6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of June 2020

Commission File Number: 001-38781

HEXO Corp.

(Translation of registrant’s name into English)

3000 Solandt Road

Ottawa, Ontario, Canada K2K 2X2

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F  ☐    Form 40-F  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

EXPLANATORY NOTE

Exhibits 99.1 and 99.2 included with this Report on Form 6-K are hereby incorporated by reference into the Registration Statement on Form F-10 of HEXO Corp. (File No. 333-228924).

Exhibit	Description
99.1	Condensed interim consolidated financial statements for the three and nine months ended April 30, 2020 and 2019
99.2	Management’s Discussion and Analysis for the three and nine months ended April 30, 2020
99.3	Form 52-109F2 — Certification of Interim Filings - CEO
99.4	Form 52-109F2 — Certification of Interim Filings - CFO

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HEXO Corp.
Date: June 12, 2020	/s/ Sebastien St-Louis
	President and Chief Executive Officer

EX-99.1

Exhibit 99.1

Condensed Interim

Consolidated Financial

Statements of HEXO Corp.

Table of Contents

Condensed Interim Consolidated Statements of Financial Position	1
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss	2
Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity	3
Condensed Interim Consolidated Statements of Cash Flows	4
Notes to the Condensed Interim Consolidated Financial Statements	5–28

Condensed Interim Consolidated Statements of Financial Position

(Unaudited, expressed in CAD $000’s)

As at	Note	April 30, 2020			July 31, 2019
Assets
Current assets
Cash and cash equivalents		$	94,325		$	113,568
Restricted cash			17,383			22,350
Short-term investments			934			25,937
Trade receivables	16		16,820			19,693
Commodity taxes recoverable and other receivables			12,178			15,247
Convertible debentures receivable	14		399			13,354
Prepaid expenses			5,592			10,762
Inventory	4		105,928			83,854
Biological assets	5		5,918			7,371
			259,477			312,136
Assets held for sale	8		11,506			—
Property, plant and equipment	6		319,605			258,793
Intangible assets	7		18,098			127,282
Investment in associate and joint ventures	19		77,601			52,849
Lease receivable – long term			4,548			—
License and prepaid royalty – HIP			1,108			1,409
Long-term investments	20		6,019			14,277
Goodwill	9		—			111,877
			697,962			878,623
Liabilities
Current liabilities
Accounts payable and accrued liabilities			26,736			45,581
Excise taxes payable			4,221			3,494
Warrant liabilities	10		2,018			493
Lease liability – current	26		4,745			—
Term loan – current	15		3,096			3,117
Onerous contract	23		3,000			—
			43,816			52,685
Liabilities directly associated with assets held for sale	8		751			—
Term loan	15		27,652			30,257
Deferred rent liability			—			946
Deferred tax liability			—			6,023
Lease liability	26		25,132			—
Convertible debentures	11		48,715			—
			146,066			89,911
Shareholders’ equity
Share capital	12		869,505			799,706
Share-based payment reserve	12		67,241			40,315
Warrants	12		73,474			60,433
Contributed surplus	11,12		31,328			—
Accumulated Deficit			(490,652	)		(112,742	)
Non-controlling interest	25		1,000			1,000
			551,896			788,712
		$	697,962		$	878,623

Commitments and contingencies (Note 23)

Subsequent events (Note 32)

Approved by the Board of Directors

/s/ Jason Ewart, Director

/s/ Michael Munzar, Director

The accompanying notes are an integral part of these consolidated financial statements.

1

Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

(Unaudited, expressed in CAD $000’s except share amounts)

		For the three months ended						For the nine months ended
	Note	April 30, 2020			April 30, 2019			April 30, 2020			April 30, 2019
Revenue from sale of goods	27	$	30,895		$	15,930		$	74,009		$	38,739
Excise taxes			(8,817	)		(2,974	)		(20,516	)		(6,792	)
Net revenue from sale of goods			22,078			12,956			53,493			31,947
Ancillary revenue			54			61			145			170
Net revenue			22,132			13,017			53,638			32,117
Cost of goods sold	4, 17		13,349			6,577			34,765			15,905
Gross margin before fair value adjustments			8,783			6,440			18,873			16,212
Realized fair value amounts on inventory sold	4		9,251			4,665			21,362			9,072
Unrealized gain on changes in fair value of biological assets	5		(6,379	)		(20,057	)		(21,378	)		(33,534	)
Write-off of biological assets and destruction costs	4,5		—			—			663			—
Write-off of inventory	4		—			—			2,175			—
Write down of inventory to net realizable value	4		181			—			39,311			—
Gross (loss)/margin		$	5,730		$	21,832		$	(23,260	)	$	40,674
Operating expenses
General and administrative	17		11,238			10,495			40,833			23,572
Marketing and promotion			2,131			5,122			9,621			21,671
Share-based compensation	12,17		6,171			8,162			22,237			17,811
Research and development			1,017			—			3,962			—
Amortization of intangible assets	7		341			137			3,690			360
Depreciation of property, plant and equipment	6		1,566			140			4,890			1,166
Restructuring costs	29		865			—			4,846			—
Impairment of property, plant and equipment	6		220			—			33,004			—
Impairment of intangible assets	7		—			—			106,189			—
Impairment of goodwill	9		—			—			111,877			—
Recognition of onerous contract	23		—			—			3,000			—
Loss on disposal of property, plant and equipment	6		3,237			—			3,734			—
		$	26,786		$	24,056		$	347,883		$	64,580
Loss from operations			(21,056	)		(2,224	)		(371,143	)		(23,906	)
Other income and losses	18		1,537			(5,527	)		(12,790	)		(979	)
Loss and comprehensive loss attributable to shareholders before tax		$	(19,519	)	$	(7,751	)	$	(383,933	)	$	(24,885	)
Income tax	31		—			—			6,023			—
Total Net Loss		$	(19,519	)	$	(7,751	)	$	(377,910	)	$	(24,885	)
Net loss per share, basic and diluted		$	(0.07	)	$	(0.04	)	$	(1.39	)	$	(0.12	)
Weighted average number of outstanding shares
Basic and diluted	12		295,411,374			210,013,865			271,745,648			201,084,341

The accompanying notes are an integral part of these consolidated financial statements.

2

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited, expressed in CAD $000’s except share amounts)

For the nine months ended	Note	Number of common shares		Share capital			Share-based payment reserve			Warrants			Contributed surplus			Non- controlling interest		Accumulated Deficit			Shareholders’ equity
Balance at July 31, 2019			256,981,753	$	799,706		$	40,315		$	60,433		$	—		$	1,000	$	(112,742	)	$	788,712
April 2020 underwritten offering	12		59,800,000		25,864			—			20,182			—			—		—			46,046
Issuance of common shares - USD$25m registered offering	12		14,970,062		26,782			—			—			—			—		—			26,782
Issuance of common shares - USD$20m registered offering	11		11,976,048		22,323			—			—			—			—		—			22,323
$70m private placement unsecured convertible debentures	11		—		—			—			—			23,902			—		—			23,902
Issuance fees			—		(5,570	)		—			—			(27	)		—		—			(5,597	)
Exercise of stock options	12		116,532		223			(88	)		—			—			—		—			135
Expiry of stock options	12		—		—			(312	)		—			312			—		—			—
Exercise of warrants	10,12		71,424		177			—			—			—			—		—			177
Expiry of warrants	12		—		—			—			(7,141	)		7,141			—		—			—
Share-based compensation	12,17		—		—			27,326			—			—			—		—			27,326
Total net loss			—		—			—			—			—			—		(377,910	)		(377,910	)
Balance at April 30, 2020			343,915,819	$	869,505		$	67,241		$	73,474		$	31,328		$	1,000	$	(490,652	)	$	551,896
Balance at July 31, 2018			193,629,116	$	347,233		$	6,139		$	12,635		$	—		$	—	$	(43,134	)	$	322,873
Issuance of common shares	12		8,855,000		57,558			—			—			—			—		—			57,558
Issuance fees	12		—		(3,767	)		—			—			—			—		—			(3,767	)
Issuance of warrants	19		—		—			—			42,386			—			—		—			42,386
Exercise of stock options	12		1,445,178		1,496			(589	)		—			—			—		—			907
Exercise of warrants	10,12		5,615,658		14,027			—			(1,268	)		—			—		—			12,759
Exercise of broker/finder warrants	12		1,866,527		7,836			—			(1,578	)		—			—		—			6,258
Stock-based compensation	12		—		—			18,599			—			—			—		—			18,599
Net loss			—		—			—			—			—			—		(24,885	)		(24,885	)
Balance at April 30, 2019			211,411,479	$	424,383		$	24,149		$	52,175		$	—		$	—	$	(68,019	)	$	432,688

The accompanying notes are an integral part of these consolidated financial statements.

3

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited, expressed in CAD $000’s)

For the nine months ended	Note		April 30, 2020			April 30, 2019
Operating activities
Total net loss			$	(377,910	)	$	(24,885	)
Items not affecting cash
Income tax recovery				(6,023	)		—
Depreciation of property, plant and equipment		6		4,890			1,166
Depreciation of property, plant and equipment in cost of sales				2,313
Amortization of intangible assets		7		3,690			360
Unrealized revaluation loss/(gain) on convertible debenture		14		3,253			(1,862	)
Unrealized gain on changes in fair value of biological assets		5		(21,378	)		(33,534	)
Unrealized fair value adjustment on investments		20		8,535			—
Loss on investment				1,444			277
Non-cash interest expense/(income)				6,850			(195	)
License depreciation and prepaid royalty expenses – HIP				301			—
Write-off of inventory and biological assets				2,838			—
Write down of inventory to net realizable value		4		39,311			—
Share of loss from investment in associate and joint ventures		19		4,468			1,712
Realized fair value amounts on inventory sold		4		21,362			9,072
Share-based compensation		12,17		22,237			18,599
Revaluation of financial instruments (gain)/loss		10		(7,966	)		4,273
Impairment of goodwill and other impairments				251,070			—
Onerous contract		23		3,000			—
Loss on disposal of property, plant and equipment				3,734			—
Changes in non-cash operating working capital items		30		(59,650	)		(19,420	)
Cash used in operating activities				(93,631	)		(44,437	)
Financing activities
Issuance of common shares		12		104,748			57,558
Issuance fees		12		(5,773	)		(3,767	)
Proceeds from the exercise of stock options		12		135			907
Proceeds from the exercise of warrants		12		71			15,321
Acquisition of term loan		12		—			33,746
Payments on term loans		12		(2,625	)		—
Leasing payments		26		(3,196	)		—
Issuance of unsecured convertible debentures		11		70,000			—
Interest paid on unsecured convertible debentures		11		(1,804	)		—
Cash from financing activities				161,556			103,765
Investing activities
Settlement of short-term investments				24,726			112,651
Proceeds from sale of investments		20		8,258			—
Restricted cash				4,967			(15,239	)
Proceeds from sale of property, plant and equipment		6		716			—
Acquisition of property, plant and equipment				(95,998	)		(103,073	)
Purchase of intangible assets				(617	)		(1,933	)
Investment in associate and joint ventures		19		(29,220	)		(7,298	)
Acquisition of long-term investments		20		—			(2,970	)
Cash from investing activities				(87,168	)		17,862
(Decrease) increase in cash and cash equivalents				(19,243	)		41,466
Cash and cash equivalents, beginning of period				113,568			131,626
Cash and cash equivalents, end of period			$	94,325		$	173,092

The accompanying notes are an integral part of these consolidated financial statements.

4

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended April 30, 2020 and 2019

(Unaudited, expressed in CAD and in $000’s except share amounts or where otherwise stated)

1. Description of Business

HEXO Corp. (the “Company”), is a publicly traded corporation, incorporated in Ontario. HEXO is licensed to produce and sell cannabis under the Cannabis Act. Its head office is located at 3000 Solandt Road Ottawa, Canada. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”), both under the trading symbol “HEXO”.

COVID-19

In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in Wuhan, China. Since then, it has spread to most other countries and infections have been reported around the world. Canada confirmed its first case of COVID-19 on January 25, 2020 and its first death related to COVID-19 on March 9, 2020. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. In response to the outbreak, governmental authorities in Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions.

2. Basis of Presentation

Statement of Compliance

These condensed interim consolidated financial statements (“interim consolidated financial statements”) have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”), using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and IFRS Interpretations Committee (“IFRIC”). These interim consolidated financial statements do not contain all the disclosures required in annual consolidated financial statements and should be read in conjunction with the amended and restated annual consolidated financial statements of the Company for the year ended July 31, 2019, prepared in accordance with IFRS.

The interim consolidated financial statements have been prepared using accounting policies consistent with those described in the amended and restated annual consolidated financial statements for the year ended July 31, 2019, except for the adoption of the new lease standard and the adoption of a new policy for restricted share units and assets held for sale as disclosed in Note 3.

These interim consolidated financial statements were approved and authorized for issue by the Board of Directors on June 10, 2020.

3. Changes to Accounting Policies, Accounting Standards and Interpretations

RESTRICTED SHARE UNITS (“RSU’S”)

RSUs are equity-settled share-based payments granted to certain employees, directors and executives within the Company. RSUs are measured at their initial fair value on the date of the grant based upon a volume weighted market price and are recognized as share-based compensation expense over the vesting period with a corresponding credit to share-based reserves. Upon the release of RSUs in the form of common shares, the related share-based reserve is transferred to share capital.

Amounts recorded for forfeited RSUs are transferred to Accumulated Deficit in the year of forfeiture or expiry.

ASSETS HELD FOR SALE

Non-current assets or disposal groups comprising of assets and liabilities are classified as held-for-sale when it is highly probable that they will be recovered through sale activity rather than a continuance of use. These assets and/or disposal groups are measured at the lower of their carry amounts and their fair value less costs to sell. Impairment losses upon the classification of assets or disposal groups as held-for-sale as well as the gains or losses on remeasurement at the time of sale are recognized in profit and losses. Once classified as held-for-sale, assets are no longer depreciated.

Change in Accounting Policy

IFRS 16, LEASES

The Company adopted IFRS 16 Leases on August 1, 2019, which introduces a new approach to lease accounting. The Company adopted the standard using the modified retrospective approach, which does not require restatement of prior period financial information, as it recognizes the cumulative impact on the opening balance sheet and applies the standard prospectively. Accordingly, the comparative information in these unaudited interim consolidated financial statements is not restated.

5

At the inception of a contract, the Company assesses whether the contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This policy is applied to contracts entered into, or modified, on or after August 1, 2019.

Practical expedients

Effective August 1, 2019, the IFRS 16 transition date, the Company elected to use the following practical expedients under the modified retrospective transition approach:

• Leases with lease terms of less than twelve months (short-term leases) and leases of low-value assets (less than $5,000 U.S. dollars) (low-value leases) that have been identified at transition were not recognized in the interim consolidated statement of financial position;

• Right-of-use assets on transition were measured at the amount equal to the lease liabilities at transition, adjusted by the amount of any prepaid or accrued lease payments;

• For certain leases having associated initial direct costs, the Company, at initial measurement on transition, excluded these directs costs from the measurement of the right-of-use assets; and

• Any provision for onerous lease contracts previously recognized at the date of adoption of IFRS 16 has been applied to the associated right-of-use asset recognized upon transition.

The Company as a lessee

Where the Company is a lessee, a right-of-use asset representing the right to use the underlying asset with a corresponding lease liability is recognized when the leased asset becomes available for use by the Company.

The right-of-use asset is recognized at cost and is depreciated on a straight-line basis over the shorter of the estimated useful life of the asset and the lease term on a straight-line basis. The cost of the right-of-use asset is based on the following:

• the amount of initial recognition of related lease liability;

• adjusted by any lease payments made on or before inception of the lease;

• increased by any initial direct costs incurred; and

• decreased by lease incentives received and any costs to dismantle the leased asset.

The lease term includes consideration of an option to extend or to terminate if the Company is reasonably certain to exercise that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

Lease liabilities are initially recognized at the present value of the lease payments. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Subsequent to recognition, lease liabilities are measured at amortized cost using the effective interest rate method. Lease liabilities are remeasured when there is a change in future lease payments arising mainly from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, renewal or termination option.

The payments related to short-term leases and low-value leases are recognized as other expenses over the lease term in the interim consolidated statements of loss and comprehensive loss.

Significant accounting estimates and assumptions

In the situation where the implicit interest rate in the lease is not readily determined, the Company uses judgment to estimate the incremental borrowing rate for discounting the lease payments. The Company’s incremental borrowing rate generally reflects the interest rate that the Company would have to pay to borrow a similar amount at a similar term and with a similar security. On adoption of IFRS 16, the Company has determined a single IBR as the discount rate across all administrative real estate leases due to the leases containing similar characteristics. A separate IBR was used for the discounting of the Company’s production real estate property. The IBRs utilized for administrative real estate and production real estate were 8% and 12%, respectively.

The Company estimates the lease term by considering the facts and circumstances that create an economic incentive to exercise an extension or termination option. Certain qualitative and quantitative assumptions are used when evaluating these incentives.

The Company as a lessor

The Company’s unaudited interim consolidated financial statements were not impacted by the adoption of IFRS 16 Leases in relation to lessor accounting. Lessors will continue with the dual classification model for recognized leases with the resultant accounting remaining unchanged from IAS 17, Leases.

6

Impact of Change in Accounting Policy

On August 1, 2019, the Company recognized $21,360 of right-of-use assets and $21,360 of lease liabilities. The Company applied its weighted average incremental borrowing rate as at August 1, 2019 to determine the amount of lease liabilities. The effect of the adjustment to the amounts recognized in the Company’s interim consolidated statement of financial position at August 1, 2019 is shown below.

			IFRS 16 remeasurement		As reported under
	August 1, 2019,		adjustments on		IFRS 16
	as previously reported		August 1, 2019		August 1, 2019
Assets
Non-current
Property, plant and equipment	$	258,793	$	21,360	$	280,153
Total Assets	$	258,793	$	21,360	$	280,153
Liabilities
Current liabilities
Lease liabilities		—		3,556		3,556
Non-current liabilities
Lease liabilities		—		17,804		17,804
Total Liabilities	$	—	$	21,360	$	21,360

Total commitments as at July 31, 2019 were $192,230, which included certain contractual financial obligations related to service agreements, purchase agreements, operating lease agreements, and construction contracts. Of this total, $101,741 is related to operating lease commitments. The following is a reconciliation of total operating lease commitments as at July 31, 2019 to the lease liabilities recognised as at August 1, 2019:

Total operating leases commitments as at July 31, 2019	$	101,741
Less: Variable components of operating leases		(49,330	)
Less: Low value and/or short-term lease		(88	)
Operating lease liability before discounting		52,323
Adjustment to reflect discounting of operating lease commitments at August 1, 2019, using the incremental borrowing rate		(30,963	)
Total lease liabilities recognized under IFRS 16 as at August 1, 2019 (Note 26)	$	21,360

4. Inventory

	As at April 30, 2020
	Capitalized		Biological asset fair
	cost		value adjustment		Total
Dried cannabis	$	51,268	$	12,751	$	64,019
Oils		8,536		3,421		11,957
Purchased dried cannabis and oil extract		23,198		—		23,198
Hemp derived distillate		844		—		844
Packaging and supplies		5,910		—		5,910
	$	89,756	$	16,172	$	105,928

The inventory expensed to cost of goods sold in the three and nine months ended April 30, 2020, was $13,349 and $34,765, respectively (April 30, 2019 – $6,577 and $15,905). Total share-based compensation capitalized to inventory in the three and nine months ended April 30, 2020 was $1,358 and $5,088, respectively (April 30, 2019 – $402 and $788). The realized fair value on inventory sold during the three and nine months ended April 30, 2020 was $9,251 and $21,362, respectively (April 30, 2019 – $4,665 and $9,072). In the three and nine months ended April 30, 2020, the Company recorded a write-off on inventory of $nil and $2,175, respectively, and impairment losses on inventory of $181 and $39,311, realized on cannabis purchased in which the cost exceeds its net realizable value.

7

	As at July 31, 2019
	Capitalized		Biological asset fair
	cost		value adjustment		Total
Dried cannabis	$	28,996	$	19,471	$	48,467
Oils		7,754		5,366		13,120
Purchased dried cannabis and oil extract		17,588		—		17,588
Hemp derived distillate		1,523		—		1,523
Packaging and supplies		3,156		—		3,156
	$	59,017	$	24,837	$	83,854

5. Biological Assets

The Company’s biological assets consist of cannabis plants from seeds all the way through to mature plants. The changes in the carrying value of biological assets are as follows:

	For the				For the
	nine months ended				year ended
	April 30, 2020				July 31, 2019
Balance, beginning of period		$	7,371			$	2,332
Acquired through acquisition1			—				3,291
Production costs capitalized			30,395				19,215
Unrealized gain on changes in fair value of biological assets			21,378				38,856
Transferred to inventory upon harvest			(52,563	)			(56,323	)
Write-off on biological assets and destruction costs			(663	)			—
Balance, end of period		$	5,918			$	7,371

¹  Acquired through the Newstrike acquisition on May 24, 2019

As at April 30, 2020, the fair value of biological assets included $6 in seeds and $5,912 in cannabis plants ($2 in seeds and $7,369 in cannabis plants as at July 31, 2019). During the three and nine months ended April 30, 2020, the Company recorded destruction costs and a write off on its biological assets of $nil and $663, respectively, due to the suspension of production at the Niagara facility.

The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period-end.

Management’s identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the tables below.

Unobservable inputs	Input values		An increase or decrease of 5% applied to the
			unobservable input would result in a change
			to the fair value of approximately
	April 30, 2020	July 31, 2019	April 30, 2020		July 31, 2019
Weighted average selling price Derived from actual retail prices on a per product basis using the expected Flower and Trim yields per plant.	$3.64 per dried gram	$4.23 per dried gram	$	416	$	601
Yield per plant Derived from historical harvest cycle results on a per strain basis.	65 – 157 grams per plant	15 – 123 grams per plant	$	290	$	295
Stage of growth Derived from the estimates of stage of completion within the harvest cycle.	Average of 40% completion	Average of 29% completion	$	290	$	295
Waste Derived from the estimates of planned removal and naturally occurring waste within the cultivation and production cycle.	0%–30% dependent upon the stage within the harvest cycle	0%–30% dependent upon the stage within the harvest cycle		No material variance		No material variance

8

6. Property, Plant and Equipment    

Cost	Land			Buildings			Leasehold improvements		Cultivation and production equipment			Furniture, computers, vehicles and equipment			Construction in progress			Right-of-Use assets		Total
	$			$			$		$			$			$			$		$
At July 31, 2018		1,038			32,536			206		4,031			2,471			15,433			—		55,715
Business acquisitions		4,301			18,855			—		9,913			648			12,286			—		46,003
Additions		—			11,365			421		28,085			7,249			117,909			—		165,029
Transfers		—			88,078			—		—			—			(88,078	)		—		—
At July 31, 2019		5,339			150,834			627		42,029			10,368			57,550			—		266,747
Additions		—			26,221			1,338		2,702			4,084			63,838			24,171		122,354
Disposals		—			—			—		(10,092	)		—			—			—		(10,092	)
Transfers		—			—			20,697		2,922			—			(23,619	)		—		—
Reclassified held for sale		(3,990	)		(20,413	)		—		(2,272	)		(544	)		(10,832	)		—		(38,051	)
At April 30, 2020		1,349			156,642			22,662		35,289			13,908			86,937			24,171		340,958
Accumulated depreciation and impairments
At July 31, 2018		—			533			9		69			771			—			—		1,382
Depreciation		—			3,859			121		1,497			1,095			—			—		6,572
Transfers		—			—			—		650			(650	)		—			—		—
At July 31, 2019		—			4,392			130		2,216			1,216			—			—		7,954
Depreciation		—			5,760			577		2,747			2,143			—			1,884		13,111
Transfers		—			—			—		335			(335	)		—			—		—
Disposals		—			—			—		(6,171	)		—			—			—		(6,171	)
Impairments		383			18,955			—		6,964			9			5,515			1,178		33,004
Reclassified held for sale		(383	)		(19,259	)		—		(1,252	)		(136	)		(5,515	)		—		(26,545	)
At April 30, 2020		—			9,848			707		4,839			2,897			—			3,062		21,353
Net book value
At July 31, 2018		1,038			32,003			197		3,962			1,700			15,433			—		54,333
At July 31, 2019		5,339			146,442			497		39,813			9,152			57,550			—		258,793
At April 30, 2020		1,349			146,794			21,955		30,450			11,011			86,937			21,109		319,605

As at April 30, 2020, there was $4,958 (July 31, 2019 – $21,265) of property, plant and equipment in accounts payable and accrued liabilities. During the three and nine months ended April 30, 2020, the Company capitalized $2,505 and $8,221, respectively (April 30, 2019 – $1,614 and $2,527), of depreciation to inventory. Capitalized borrowing costs to buildings were realized in the nine months ended April 30, 2020 in the amount of $1,616 (July 31, 2019 – $511) at an average interest rate of 5.4% (July 31, 2019 – 3.2%). During the three and nine months ended April 30, 2020, depreciation expensed to the interim consolidated statement of loss and comprehensive loss was $1,566 and $4,890, respectively (April 30, 2019 - $140 and $1,166). Impairment losses are comprised of $31,606 of the initial impairment of the Niagara facility and an additional $220 recorded on transfer of the assets to Assets held for sale (Note 8).

The Company has classified certain Niagara based property, plant and equipment as assets held for sale (Note 8).

Adjustments to construction in progress during the period reflect the activation of an asset’s useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification. Right-of-use assets in the period were impaired by an amount of $1,178 due to the abandonment of a commercial administration building which the Company intends to sublease and included in the additions is the deferred rent liability of $1,116, previously accounted for under IAS 17 - Leases.

IMPAIRMENT OF NIAGARA FACILITY

On March 2, 2020, the Company completed a strategic review of its cultivation capacity and made the decision to market the Niagara facility for sale. As a result, the carrying amount of the Niagara facility is expected to be recovered principally through sale rather than through continuing use (Note 8).

The Niagara facility was subject to impairment testing as at January 31, 2020. The Niagara facility was acquired from Newstrike in May 2019 and consists primarily of equipment, cultivation and processing facilities and land assets that are included within property, plant and equipment, as well as related cultivation and processing licenses that are recorded as intangible assets (Note 10). These assets were previously included in the HEXO CGU.

Recoverable amount was determined by reference to fair value less costs of disposal using a market approach. The market approach was based on comparable transactions for similar assets, which is categorized within Level 2 of the fair value hierarchy. As a result, an impairment loss of $31,606 was recorded in property, plant and equipment in the three months ended January 31, 2020. Additional impairment losses were recorded for cultivation and processing licenses (Note 7).

9

The adjustments reflect the activation of an asset’s useful life, transitioning from construction in progress to the appropriate property, plant and equipment classification.

7. Intangible Assets

	Cultivating and							Domain
Cost	processing license		Brand		Software			names		Patents		Other			Total
	$		$		$			$		$		$			$
At July 31, 2018		2,545		—		1,800			585		—		312			5,242
Business acquisitions		113,888		8,440		12			—		—		—			122,340
Additions		—		—		1,746			—		1,231		—			2,977
Transfers		—		—		—			—				(312	)		(312	)
At July 31, 2019		116,433		8,440		3,558			585		1,231		—			130,247
Additions		—		—		566			—		678		—			1,244
Disposals		—		—		(549	)		—		—		—			(549	)
At April 30, 2020		116,433		8,440		3,575			585		1,909		—			130,942
Accumulated amortization
At July 31, 2018		403		—		786			9		—		—			1,198
Amortization		1,198		—		483			57		29		—			1,767
At July 31, 2019		1,601		—		1,269			66		29		—			2,965
Amortization		3,039		—		545			44		62		—			3,690
Impairment		106,189		—		—			—		—		—			106,189
At April 30, 2020		110,829		—		1,814			110		91		—			112,844
Net book value
At July 31, 2018		2,142		—		1,014			576		—		312			4,044
At July 31, 2019		114,832		8,440		2,289			519		1,202		—			127,282
At April 30, 2020		5,604		8,440		1,761			475		1,818		—			18,098

As at April 30, 2020, there were $102 (July 31, 2019 – $422) of intangible assets in accounts payable and accrued liabilities. Research and development expenses in the period amounted to $1,017 and $3,962, respectively (July 31, 2019 - $nil). The transfer represents $212 of capitalized transaction costs being allocated to the Truss investment in associate (Note 19) and $100 other longer-term investment has been reclassified to long-term investments.

Impairment of the Niagara Facility and Associated Long Lived Assets

In connection with the impairment loss recorded in the second quarter of fiscal 2020, for the Niagara facility (Note 6), the Company recorded an impairment loss of $106,189 relating to cultivation and processing licenses associated with the Niagara facility.

8. Assets Held for Sale

The following assets and liabilities were reclassified as held for sale:

									Furniture,
					Cultivation and				computers,
					production		Construction in		vehicles and
Net Book Value	Land		Building		equipment		progress		equipment		Total
	$		$		$		$		$		$
At July 31, 2019		—		—		—		—		—		—
Additions		3,607		1,154		1,020		5,317		408		11,506
At April 30, 2020		3,607		1,154		1,020		5,317		408		11,506

On March 2, 2020, the Company completed a strategic review of its cultivation capacity and made the decision to market the Niagara facility and the associated excess equipment for sale. The Company obtained a third-party sale offer which was utilized as the basis to determine the fair value of the assets. On April 27, 2020 the Board of Directors approved the sale of the Niagara property. Subsequent to April 30, 2020, on May 25, 2020 the Company accepted an offer to sell the property and related assets for proceeds of approximately $10,250. The sale is expected to close before year end (Note 32).

Liabilities to be assumed by the acquirer related to the assets held for sale were $751.

9. Goodwill

Balance as at July 31, 2018	$	—
Additions		111,877
Balance as at July 31, 2019	$	111,877
Impairment		(111,877	)
Balance as at April 30, 2020	$	—

10

Goodwill was created through the acquisition of Newstrike Brands Limited (“Newstrike”) on May 24, 2019 and is monitored at the operating segment level, which a company-wide level. As at January 31, 2020, the carrying amount of the Company’s total net assets significantly exceeded the Company’s market capitalization. In addition, slower than expected retail store roll outs in Canada and delays in government approval for cannabis derivative products resulted in a constrained distribution channels, which have adversely affected overall market sales and profitability. As a result of these factors, management performed an indicator-based impairment test of goodwill as at January 31, 2020.

The recoverable amount was determined based on fair value less cost of disposal using a market-based approach (Level 2) which considered both the adjusted current market capitalization of the Company and an income based discounted cash flow analysis (DCF).

The calculation of the adjusted market capitalization was based on the share price of the Company on January 31, 2020, adjusted for a control premium of 10%, which was estimated by reference to premiums in recent acquisitions involving control, and from data on empirical control premium studies that considered industry, pricing, background, deal size, and timing of the observed premiums. If all other assumptions were held constant, and the share price declined by 5%, the impairment loss would increase by $26,647.

If all other assumption were held constant and the control premium was decreased by 5%, the impairment loss would increase by $24,283. The income based Discounted cash flow (“DCF”) analysis (Level 3) was also used to corroborate the results of the adjusted market capitalisation based valuation. The significant assumptions in the DCF analysis were as follows:

i. Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and market trends. A discrete four-and-a-half-year period was forecasted with an extended 5 year period calculated using the H-Model which is an alternative dividend discount model that assumes the growth rate will fall linearly to the terminal value with a short-term growth rate of 10% in the first year, declining each year over the 5 years to a terminal growth rate of 3%. If all other assumption were held constant and the short-term growth rate in the first year was decreased by 1%, the impairment loss would increase by $12,598;

ii. Terminal value growth rate: Management used a 3% terminal growth rate which is based on historical and projected consumer inflation, historical and projected economic indicators, and projected industry growth. If all other assumption were held constant and the terminal growth rate was decreased by 1%, the impairment loss would increase by $27,000;

iii. Post-tax discount rate: Management used a 15.9% post-tax discount rate which is reflective of an industry Weighted Average Cost of Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium based on a direct comparison approach, a size premium and company specific risk, and after-tax cost of debt based on corporate bond yields. If all other assumption were held constant and the discount rate was in increased by 1%, the impairment loss would increase by $53,933; and

iv. Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date.

As a result, management concluded that the carrying value of the HEXO CGU was higher than the recoverable amount and recorded a goodwill impairment loss of $111,877 during the second quarter of fiscal year 2020. The Company’s goodwill impairment loss for the three and nine months period ended April 30, 2020 was $nil and $111,877, respectively (April 30, 2019 – $nil and $nil).

10. Warrant Liabilities

	2017 Unsecured			USD$25,000			USD$20,000
	Convertible Debentures			Registered Direct			Registered Direct
	Warrants			Offering			Offering			Total
Opening balance as at August 1, 2018	$	3,130		$	—		$	—		$	3,130
Exercised		(6,367	)		—			—			(6,367	)
Loss in revaluation of financial instruments		3,730			—			—			3,730
Balance as at July 31, 2019	$	493		$	—		$	—		$	493
Issued		—			5,630			3,967			9,597
Exercised		(106	)		—			—			(106	)
(Gain) in revaluation of financial instruments		(387	)		(4,508	)		(3,071	)		(7,966	)
Balance as at April 30, 2020	$	—		$	1,122		$	896		$	2,018

USD$20,000 Registered Direct Offering – Warrants

On January 21, 2020, the Company closed a registered direct offering with institutional investors for gross proceeds of USD$20,000 (Note 12). Under this offering, the Company issued 5,988,024 common share purchase warrants with an exercise price of USD$2.45 per share with a five year-term. The warrants are classified as a liability because the exercise price is denominated in US dollars, which is different to the functional currency of the Company.

11

The warrant liability was initially recognized at $3,967 using the Black-Scholes-Merton option pricing model (Level 2), using the following assumptions:

• stock price of USD$1.45

• expected life of 2.5 years;

• $nil dividends;

• 80% volatility based upon historical data;

• risk free interest rate of 1.57%; and

• USD/CAD exchange rate of 1.3116.

Financing costs of $223 were expensed at recognition.

The warrant liability was revalued on April 30, 2020 using the Black-Scholes-Merton option pricing model (Level 2). The warrant liability was revalued to $896 (USD$645) using the following variables:

• stock price of USD$0.50;

• expected life of 2.5 years;

• $nil dividends;

• 97% volatility based upon historical data;

• risk-free interest rate of 0.3%; and

• USD/CAD exchange rate of 1.3910.

The gain on the revaluation of the warrant liability during the three and nine months ended April 30, 2020 was $2,202 and $3,071, respectively which is recorded in Other income and losses on the interim consolidated statements of loss and comprehensive loss.

USD$25,000 Registered Direct Offering – Warrants

On December 31, 2019, the Company closed a registered direct offering with institutional investors for gross proceeds of USD$25,000 (Note 12). Under this offering, the Company issued 7,485,032 common share purchase warrants with an exercise price of USD$2.45 per share with a five year-term. The warrants are classified as a liability because the exercise price is denominated in US dollars, which is different to the functional currency of the Company.

The warrant liability was initially recognized at $5,630 using the Black-Scholes-Merton option pricing model (Level 2), using the following input variables:

• stock price of USD$1.59;

• expected life of 2.5 years;

• $nil dividends;

• 79% volatility based upon historical data;

• risk-free interest rate of 1.71%; and

• USD/CAD exchange rate of 1.2988.

Financing costs of $350 were expensed at recognition.

The warrant liability was revalued on April 30, 2020 using the Black-Scholes-Merton option pricing model (Level 2). The warrant liability was revalued to $1,122 (USD$805) using the following variables:

• stock price of USD$0.50;

• expected life of 2.5 years;

• $nil dividends;

• 97% volatility based upon historical data;

• risk-free interest rate of 0.3%; and

• USD/CAD exchange rate of 1.3910.

The gain on the revaluation of the warrant liability during the three and nine months ended April 30, 2020 was $2,752 and $4,508, respectively which is recorded in Other income and losses on the interim consolidated statements of loss and comprehensive loss.

2017 Unsecured Convertible Debenture - Warrants

During the three months ended January 31, 2020, 71,424 warrants were excised for cash proceeds of $72 (USD$54), based on an exercise price of USD$0.76. During the three months ended October 31, 2019 no warrants were exercised. Upon expiry on November 14, 2019, the warrant liability was derecognized.

The gain on the revaluation of the warrant liability during the three and nine months ended April 30, 2020 was $nil and $387, respectively, which was recorded in Other income and losses on the interim consolidated statements of loss and comprehensive loss.

12

During the year ended July 31, 2019, 863,693 warrants were exercised for cash proceeds of $863 (USD$656), based on an exercise price of USD$0.76. On the various dates of exercise, the warrant liability was revalued using the Black-Scholes-Merton option pricing model. Overall, the fair value of the warrants on exercise was $6,367 (USD$4,819) using the following inputs:

• stock prices ranging from $5.90 to $10.36;

• expected life of 12 months;

• $nil dividends;

• 75% volatility based upon comparative market indicators and historical data;

• Risk- free interest rates of 1.55% to 2.35%; and

• USD/CAD exchange rate of various.

The warrant liability was revalued on July 31, 2019 using the Black-Scholes-Merton option pricing model (Level 2). The warrant liability was revalued to $493 (US$375); with a stock price of US$4.24; expected life of 12 months; $nil dividends; 74% volatility based upon historical data; risk-free interest rate of 1.61%; and USD/CAD exchange rate of 1.3148. The loss on the revaluation of the warrant liability for the year ended July 31, 2019 was ($3,730), which is recorded in Other income and losses on the interim consolidated statements of loss and comprehensive loss.

11. Convertible Debentures

Balance as at July 31, 2019	$	—
Issued at amortized, net issuance costs		45,922
Interest expense		4,597
Interest paid		(1,804	)
Balance as at April 30, 2020	$	48,715

$70,000 Private Placement Unsecured Convertible Debentures

On December 5, 2019, the Company closed a $70,000 private placement of convertible debentures. The Company issued a total of $70,000 principal amount of 8.0% unsecured convertible debentures maturing on December 5, 2022 (the “Debentures”). The Debentures are convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of $3.16 per share (the “Conversion Price”), subject to adjustment in certain events. The Company may force the conversion of all of the then outstanding Debentures at the Conversion Price at any time after December 7, 2020 and prior to maturity on 30 days’ notice if the daily volume weighted average trading price of the common shares of the Company is greater than $7.50 for any 15 consecutive trading days.

At any time on or before December 4, 2020, the Company may repay all, but not less than all, of the principal amount of the Debentures, plus accrued and unpaid interest. Upon maturity, the holders of the Debentures have the right to require the Company to repay any principal amount of their Debentures through the issuance of common shares of the Company in satisfaction of such amounts at a price equal to the volume weighted average trading price of the common shares on the TSX for the five trading days immediately preceding the payment date.

The Company allocated the gross proceeds first to the discounted gross proceeds of the debentures, which amounted to $46,098. The remaining balance of $23,902, was allocated to the conversion feature, which represents its inherent fair value.

In connection to closing the private placement, the Company incurred costs and fees of $204, which were allocated on a pro rata basis to the convertible debentures and conversion feature in the amounts of $176 and $28, respectively.

Interest expense for the three and nine months ended April 30, 2020 was $2,841 and $4,597, respectively. The Company made interest payments of $1,399 and $1,804 in the three and nine months ended April 30, 2020. The accrued and unpaid interest as at April 30, 2020 was $483.

The Company has agreed to the early conversion of $29,860 aggregate principal amount of its 8% unsecured convertible debentures, see Subsequent Events Note 32.

12. Share Capital

(a) Authorized

An unlimited number of common shares and an unlimited number of special shares, issuable in series.

(b) Issued and Outstanding

As at April 30, 2020, a total of 343,915,819 (July 31, 2019 – 256,981,753) common shares were issued and outstanding. No special shares have been issued or are outstanding.

13

Common Share Purchase Warrants

As at April 30, 2020, there were a total of 87,560,813 warrants outstanding.

For the nine months ended April 30, 2020

On April 13, 2020, the Company closed an underwritten public offering in which 59,800,000 units were issued at $0.77 a unit for total gross proceeds of $46,046. Each unit consisted of one common share and one common share purchase warrant which held an exercise price of $0.96 and a maturity period of five years. Net proceeds after commission fees amounted to $43,290 and $20,182 of which was allocated to the warrant reserve determined using the Black-Scholes Merton Model. The total ending gross contribution to share capital and issuance costs were $25,864 and $2,756, respectively, for a total net contribution of $23,108.

On January 22, 2020, the Company closed a registered direct offering (see Note 10 for details). The net proceeds were allocated to the warrant liability’s fair value of $3,967 determined using the Black-Scholes-Merton options pricing model and issuance costs were allocated on a pro rata basis in the amount of $223 and expensed. The total ending gross contribution to share capital and issuance costs were $22,323 and $1,250 respectively, for a total net contribution to equity of $21,073.

On December 31, 2019, the Company closed a registered direct offering (see Note 10 for details). The net proceeds were allocated to the warrant liability’s fair value of $5,629 determined using the Black-Scholes Merton Model and issuance costs were allocated on pro rata basis in the amount of $350 and expensed. The total ending gross contribution to share capital and issuance costs were $26,782 and $1,564, respectively, for a total net contribution of $25,219.

No warrants were exercised in the third quarter of fiscal 2020. During the third quarter of fiscal 2020, 4,678,307 warrants expired with exercise prices ranging from $20.76 to $27.63. The total decrease to the warrant reserve to contributed surplus amounted to $1,491.

During the second quarter of fiscal 2020, 71,424 warrants with an exercise price of USD$0.76 were exercised for proceeds of $71 (USD$54), resulting in the issuance of 71,424 common shares. During the second quarter of fiscal 2020, 10,547,920 warrants expired with exercise prices ranging from USD$0.76 to $5.60. The total decrease to the warrant reserve to contributed surplus amounted to $5,650.

No warrants were exercised in the first quarter of fiscal 2020.

For the year ended July 31, 2019

During the first quarter of fiscal 2019, 3,137,746 warrants with exercise prices ranging from $0.75 to $5.60 and USD$0.76 were exercised for proceeds of $5,589, resulting in the issuance of 3,137,746 common shares.

On January 30, 2019, the Company closed its offering of 7,700,000 common shares at a price of $6.50 per share for gross proceeds of $50,050. Included in the offering was an 1,155,000 over-allotment option pool with a price of $6.50 per share, which was exercised in full on the closing date for $7,508 and total gross proceeds of $57,558 for total common shares issued of 8,855,000. Underwriting and legal fees accumulated to $3,827 for total net proceeds of $53,731.

During the second quarter of fiscal 2019, 682,678 warrants with exercise prices ranging from $0.75 to $5.60 and USD$0.76 were exercised for proceeds of $1,307, which resulted in the issuance of 682,678 common shares.

During the third quarter of fiscal 2019, 3,661,761 warrants with exercise prices ranging from $0.75 to $5.60 and USD$0.76 were exercised for proceeds of $8,425, resulting in the issuance of 3,661,761 common shares.

On May 24, 2019, the Company completed the acquisition of Newstrike Brands Ltd., resulting in the issuance of 35,394,041 common shares.

During the fourth quarter of fiscal 2019, 8,053,544 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for proceeds of $47,396, resulting in the issuance of 8,053,544 common shares.

In fiscal 2019, a total of 15,535,729 warrants with exercise prices ranging from $0.75 to $5.60 and US$0.76 were exercised for total proceeds of $69,259, resulting in the issuance of 15,535,729 common shares.

As at July 31, 2019, there were 29,585,408 warrants outstanding.

14

The following is a consolidated summary of warrants as at April 30, 2020 and July 31, 2019.

	April 30, 2020				July 31, 2019
	Number				Number
	outstanding		Book value		outstanding		Book value
			$				$
Classified as Equity
2018 Equity financing
Exercise price of $5.60 expiring January 30, 2020		—		—		10,512,208		5,674
February 2018 financing warrants
Exercise price of $27.64 expiring February 16, 2020		—		—		4,413,498		1,331
June 2019 financing warrants
Exercise price of $15.79 expiring June 19, 2023		2,184,540		10,022		2,184,540		9,998
April 2020 underwritten public offering warrants
Exercise price of $0.96 expiring April 13, 2025		59,800,000		20,183		—		—
Broker / Consultant warrants
Exercise price of $20.85 expiring February 16, 2020		—		—		264,809		160
Exercise price of $11.84 expiring June 19, 2020		262,021		610		262,021		610
Exercise price of $0.75 expiring November 3, 2021		175,618		78		175,618		78
Exercise price of $0.75 expiring March 14, 2022		94,282		66		94,282		66
Exercise price of $15.79 expiring June 19, 2023		61		—		61		—
Inner Spirit warrants
Exercise price of $15.63 expiring July 21, 2020		71,235		129		71,235		129
Molson warrants
Exercise price of $6.00 expiring October 4, 2021		11,500,000		42,386		11,500,000		42,386
		74,087,757		73,474		29,478,272		60,432
Classified as Liability
2017 secured convertible debenture warrants
Exercise price of USD$0.76 expiring November 14, 2019		—		—		107,136		493
USD$25m Registered Direct Offering Warrants
Exercise price of USD$2.45 expiring December 31, 2024		7,485,032		1,122		—		—
USD$20m Registered Direct Offering Warrants
Exercise price of USD$2.45 expiring January 22, 2025		5,988,024		896		—		—
		13,473,056		2,018		107,136		493
		87,560,813		75,492		29,585,408		60,925

The following table summarizes warrant activity during the nine months ended April 30, 2020 and year ended July 31, 2019.

	April 30, 2020						July 31, 2019
	Number of			Weighted average			Number of			Weighted average
	warrants			exercise price2			warrants			exercise price
Outstanding, beginning of period		29,585,408			$	9.95		26,425,504			$	4.35
Expired during the period		(15,226,227	)			12.24		(531	)			—
Acquired and reissued through acquisition1		—				—		7,196,164				23.10
Issued during the period		73,273,056			$	1.41		11,500,000				6.00
Exercised during the period		(71,424	)		$	1.06		(15,535,729	)			3.61
Outstanding, end of period		87,560,813			$	2.41		29,585,408			$	9.95

¹  Warrants acquired on May 24, 2019, via the acquisition of Newstrike.

²  USD denominated warrants have been converted to the CAD equivalent as at the period end for presentation purposes.

Exercised during the nine months ended April 30, 2020 were nil (July 31, 2019 - 1,916,527) broker compensation warrants.

Stock Option Plan

The Company has a share option plan (the “Former Plan”), adopted in July 2018, that was administered by the Board of Directors who established exercise prices and expiry dates. Expiry dates were are up to 10 years from issuance, as determined by the Board of Directors at the time of issuance. On June 28, 2018, the Board of Directors put forth a new share option plan (the “Omnibus Plan”) which was approved by shareholders on August 28, 2019. Unless otherwise determined by the Board of Directors, options issued under both the Former Plan and Omnibus Plan vest over a three-year period. The maximum number of common shares reserved for issuance for options that may be granted under the Omnibus Plan is 10% of the issued and outstanding common shares or 27,262,609 common shares as at April 30, 2020. Options issued prior to July 2018 under the outgoing plan and the options assumed through the acquisition of Newstrike do not contribute to the available option pool reserved for issuance. As of April 30, 2020, the Company had 21,766,595 issued and outstanding under the Omnibus Plan, 4,440,885 issued and outstanding under the Former Plan and 1,055,129 issued and outstanding under the assumed Newstrike plan.

15

The following table summarizes the stock option grants during the nine months ended April 30, 2020.

			Options granted
			Executive and		Non-executive
Grant date	Exercise price		directors		employees		Vesting terms		Expiry period
October 29, 2019	$	3.30		829,034		2,732,277		Terms A		10 years
January 29, 2020	$	1.80		—		293,021		Terms A		10 years
April 28, 2020	$	0.69		900,000		2,565,322		Terms A		10 years

Vesting terms A – One-third of the options will vest on each of the one-year anniversaries of the date of grant over a three-year period.

The following table summarizes stock option activity during the nine months ended April 30, 2020 and the year ended July 31, 2019.

	April 30, 2020						July 31, 2019
	Options			Weighted average			Options			Weighted average
	issued			exercise price			issued			exercise price
Opening balance		24,288,919			$	5.87		14,388,066			$	3.02
Granted		7,319,654				1.68		12,693,118				7.27
Acquired and reissued through acquisition1		—				—		2,002,365				9.49
Forfeited and terminated		(4,229,432	)			3.66		(1,226,763	)			6.33
Exercised		(116,532	)			1.15		(3,567,867	)			1.20
Closing balance		27,262,609			$	5.23		24,288,919			$	5.87

¹  Stock options assumed on May 24, 2019, via the acquisition of Newstrike.

The following table summarizes information concerning stock options outstanding as at April 30, 2020.

Exercise price		Number outstanding		Number exercisable
$	0.58		372,900		363,000
	0.75		1,140,000		1,140,000
	1.27		475,871		475,871
	3.15		4,748		4,748
	6.00		695,544		695,544
	1.37		109,360		109,360
	2.48		86,332		79,336
	2.69		850,000		598,332
	4.24		202,506		156,014
	17.37		142,463		142,463
	3.89		325,000		216,668
	16.58		31,659		31,659
	16.74		18,995		18,995
	4.27		774,574		547,921
	4.89		4,918,781		3,259,967
	5.14		104,342		61,867
	10.42		31,284		31,284
	10.42		79,148		59,358
	11.84		18,995		14,244
	7.93		867,464		562,010
	5.92		195,000		82,939
	5.09		222,752		127,971
	8.84		32,293		32,293
	7.13		660,167		226,183
	7.46		3,333,333		—
	8.50		985,834		329,199
	8.24		613,334		205,037
	6.54		2,553,985		—
	5.88		250,000		50,000
	3.30		3,425,483		—
	1.80		275,140		—
$	0.69		3,465,322		—
			27,262,609		9,622,263

Restricted Share Units (“RSUs”)

Under the Omnibus Plan, the Board of Directors is authorized to issue RSUs up to 10% of the issued and outstanding common shares, inclusive of the outstanding stock options. At the time of issuance, the Board of Directors establishes conversion values and expiry dates, which are up to 10 years from the date of issuance. The restriction criteria of the units are at the discretion of the Board of

16

Directors and from time to time may be inclusive of Company based performance restrictions, employee-based performance restrictions or no restrictions to the units.

The following table summarizes RSU activity during the nine months ended April 30, 2020 and the year ended July 31, 2019.

				April 30, 2020					July 31, 2019
	Units			Value of units			Units		Value of units
Opening balance		—			$	—		—		$	—
Granted		1,428,449				2.94		—			—
Forfeited		(90,114	)			2.94		—			—
Closing balance		1,338,335			$	2.94		—		$	—

The following table summarizes the RSUs granted during the nine months ended April 30, 2020. No RSUs were issued in the year ended July 31, 2019.

			RSUs granted
			Executive and		Non-executive
Grant date	Unit value		directors		employees		Vesting terms		Expiry period
October 29, 2019	$	2.94		1,428,449		—		Terms A		10 years

Vesting terms A – The units vest in full on the third-year anniversary after the grant date.

Share-based Compensation

For the three and nine months ended April 30, 2020, the Company recorded $7,528 and $27,326, respectively (April 30, 2019 – $8,565 and $18,599), in share-based compensation, which are measured at fair value at the date of grant and are expensed over the vesting period (See Note 17 for share-based compensation allocation by expense group). In determining the amount of share-based compensation, the Company used the Black-Scholes-Merton option pricing model to establish the fair value of options granted at grant date by applying the following assumptions:

	April 30, 2020			July 31, 2019
Exercise price		$0.69–$3.30			$0.75–$8.95
Stock price		$0.73–$3.03			$5.09–$8.50
Risk-free interest rate		0.41%–1.62	%		1.54%–2.42	%
Expected life of options (years)		5			5-7
Expected annualized volatility		83%–97	%		64%–76	%

Volatility was estimated using the average historical volatility of the Company and comparable companies in the industry that have trading history and volatility history.

For the three and nine months ended April 30, 2020, the Company allocated to inventory $1,358 and $5,088, respectively, (April 30, 2019 – $403 and $788) of share-based compensation applicable to direct and indirect labour in the cultivation and production process.

13. Net Loss per Share

The following securities could potentially dilute basic net loss per share in the future but have not been included in diluted loss per share because their effect was anti-dilutive:

	April 30, 2020		July 31, 2019
Options		27,262,609		24,288,919
RSUs		1,338,335		—
2017 Secured convertible debenture warrants		—		107,136
2018 Equity warrants		—		10,512,208
2018 February 2018 financing warrants		—		4,413,498
2019 June financing warrants		2,184,540		2,184,540
USD$25m registered direct offering warrants		7,485,032		—
USD$20m registered direct offering warrants		5,988,024		—
2020 April underwritten public offering warrants		59,800,000		—
Joint venture and Inner Spirit issued warrants		11,571,235		11,571,235
Convertible debenture broker/finder warrants		531,982		796,791
		116,161,757		53,874,327

17

14. Convertible Debentures Receivable

CONVERTIBLE LP DEBENTURE

On January 23, 2020, $3,000 of debentures were converted using conversion rate of $1.15 into 2,608,695, common shares of FAF. The Company fully disposed of these shares on January 27, 2020 at an average market price of $1.0541 for total proceeds of $2,724 net of commission expenses amounting to $26.

On February 11, 2020, the remaining $7,000 of debentures were converted using conversion rate of $1.15 into 6,086,956, common shares of FAF. The Company fully disposed of these shares on February 18, 2020 at an average market price of $0.75 for total proceeds of $4,504 net of commission expenses amounting to $61.

The total realized loss on the disposal for the three and nine months ended April 30, 2020 was $1,217 and $1,468, respectively.

As at April 30, 2020, the balance of the LP Debenture receivable consists of the accrued and unpaid interest and was fair valued using the FAF April 30, 2020 quoted share price of $0.62 (July 31, 2019 - $1.33), resulting in a fair value of $399 (July 31, 2019 – $12,024). During the three and nine months ended April 30, 2020, the loss was $212 and $2,843, respectively due to fair value adjustments.

15. Term Loan

Term Loan

On February 14, 2019, the Company entered into a syndicated credit facility with Canadian Imperial Bank of Commerce (“CIBC”) as Sole Bookrunner, Co-Lead Arranger and Administrative Agent and Bank of Montreal as Co-Lead Arranger and Syndication Agent (together “the Lenders”). The Lenders provided the Company with up to $65,000 in secured debt financing at a rate of interest that is expected to average in the mid-to-high 5% per annum range. The credit facility consisted of an up to $50,000 term loan (“Term Loan”) and up to a $15,000 in a revolving credit facility (“Revolving Loan”). The credit facility matures in February 14, 2022. The Company may repay the loan without penalty, at any time and the loan is secured against the Company’s property, plant and equipment. The Company shall repay at minimum 2.5% of the initial amount drawn each quarter per the terms of the credit facility agreement. On February 14, 2019, the Company received $35,000 on the Term Loan and incurred financing costs of $1,347. At April 30, 2020, $nil is drawn down on the Revolving Loan (July 31, 2019 - $nil). The Company had the ability to draw the remaining $15,000 on the Term Loan on or before December 31, 2019, which it did not exercise, as a result, that portion of the facility expired on December 31, 2019.

On January 31, 2020, the Company amended its credit facility which resulted in:

(i) The modification of financial covenants which require the Company to:

i. Maintain a Tangible Net Worth Ratio of not more than 1:00 to 1:00 at all times;

ii. Maintain a Cash Balance of more than $15,000 at all times; and

iii. Maintain certain EBITDA requirements (as defined in the Credit Facility Agreement) with respect to each Fiscal Quarter.

(ii) the re-instatement of the $15,000 Term Loan capacity that previously expired un-used on December 31, 2019. In order for the Company to draw on this additional capacity, the Company must be (i) in compliance with its debt covenants; and (ii) achieve net revenue of $28,400 for the quarter ended July 31, 2020. The additional capacity is available to be drawn upon until November 30, 2020.

The Company is in compliance with the revised debt covenants as at April 30, 2020 and has complied with the stated amendments as outlined below. The credit facility was amended effective March 27, 2020 to include a covenant that, on or before April 10, 2020: (i) the Company shall have received such securities regulatory authority exemptive relief as is necessary to permit it to conduct an “at-the-market distribution” of common shares; or (ii) the Company shall have (a) entered into one or more definitive agreements with purchasers for the sale of common shares for aggregate net proceeds of at least $15,000, and (b) taken all other steps reasonably necessary, including filing any prospectus and obtaining any stock exchange or other regulatory or third party approval as may be required, to complete the issuance and sale of such common shares as soon as reasonably practicable after the entry into of such definitive agreements. In addition, a covenant was added that the Company shall have received net cash proceeds from the issuance of equity securities of not less than $40 million on or before April 30, 2020, which was met through the closing of the $46 million underwritten public offering on April 13, 2020.

During the nine months ended April 30, 2020, total interest expense and total interest capitalized were $567 (July 31, 2019 - $252) and $752 (July 31, 2019 - $511), respectively. Non-cash interest expense relating to the amortization of deferred financing costs was $364 for the nine months ended April 30, 2020 (July 31, 2019 - $387).

The following table illustrates the continuity schedule of the term loan as at April 30, 2020 and July 31, 2019:

	April 30, 2020			July 31, 2019
Term loan		$			$
Opening balance		34,125			—
Additions		—			35,000
Repayments		(2,625	)		(875	)
Ending balance		31,500			34,125

18

	April 30, 2020			July 31, 2019
Deferred financing costs		$			$
Opening balance		(751	)		—
Additions		(365	)		(1,643	)
Adjustments		—			296
Amortization of deferred finance costs		364			596
Ending balance		(752	)		(751	)
Total net term loan		30,748			33,374
Current portion		3,096			3,117
Long-term portion		27,652			30,257

16. Financial Instruments

Market Risk

Interest Risk

The Company has minimal exposure to interest rate risk related to any investments of cash and cash equivalents and its term loan. The Company may invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. The fluctuation of the interest rate may result in a material increase to the associated interest. As at April 30, 2020, the Company had short-term investments of $934 (July 31, 2019 - $517) and a term loan with a carrying value of $30,748 (July 31, 2019 – 33,374) (Note 15). All interest rates are fixed. An increase or decrease of 1% to the applicable interest rates would not result in a material variance to net loss.

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company’s level 1 and 2 investments are susceptible to price risk arising from uncertainties about their future outlook, future values and the impact of market conditions. The fair value of marketable securities and derivatives held in publicly traded entities is based on quoted market prices, which the shares of the investments can be exchanged for. The Company has agreed to the early conversion of $29,860 aggregate principal amount of its 8% unsecured convertible debentures (Note 32) which partially mitigates the Company’s Price Risk.

There would be no material impact (July 31, 2019 - $340) if the fair value of these financial assets were to increase or decrease by 10% as of April 30, 2020. The price risk exposure as at April 30, 2020 is presented in the table below.

	April 30, 2020			July 31, 2019
	$			$
Financial assets		2,452			16,756
Financial liabilities		(2,018	)		(493	)
Total exposure		434			16,263

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables and convertible debentures receivable. As at April 30, 2020, the Company was exposed to credit related losses in the event of non-performance by the counterparties.

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the medical sales are transacted with clients that are covered under various insurance programs, and adult use sales are transacted with crown corporations, the Company has limited credit risk.

Cash and cash equivalents and short-term investments are held four Canadian commercial banks with Dun and Bradstreet credit ratings of AA and $664 is held with a credit union that does not have a publicly available credit rating. The majority of the trade receivables balance is held with crown corporations of Quebec, Ontario, Alberta and British Columbia. Creditworthiness of a counterparty is evaluated prior to the granting of credit. The Company has estimated the expected credit loss using a lifetime credit loss approach. The current expected credit loss for the nine-month period ended April 30, 2020 is $131 (July 31, 2019 - $37).

In measuring the expected credit losses, the adult-use cannabis trade receivables have been assessed on a per customer basis as they consist of a low number of material contracts. Medical trade receivables have been assessed collectively as they have similar credit risk characteristics. They have been grouped based on the days past due.

Credit risk from the convertible debenture receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.

The carrying amount of cash and cash equivalents, restricted cash, short-term investments, trade receivables and convertible debentures receivable represents the maximum exposure to credit risk and as at April 30, 2020; this amounted to $129,861.

19

The following table summarizes the Company’s aging of trade receivables as at April 30, 2020 and July 31, 2019:

	April 30,		July 31,
	2020		2019
	$		$
0–30 days		15,449		14,102
31–60 days		871		1,826
61–90 days		126		166
Over 90 days		374		3,599
Total		16,820		19,693

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial performance of the Company. For the three and nine months ended April 30, 2020, the Company’s recorded sales to the crown corporation; Société québécoise du cannabis represents 76% and 75%, respectively, of total applicable periods gross cannabis sales (April 30, 2019 – 83% and 79%).

The Company holds trade receivables from the crown corporations Société québécoise du cannabis and the Ontario Cannabis Store representing 53% and 14% of total trade receivables as of April 30, 2020 (July 31, 2019 – 56% and 23%, respectively).

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at April 30, 2020, the Company had $95,259 (July 31, 2019 – $139,505) of cash and cash equivalents and short-term investments, and $16,820 in trade receivables.

The Company has current liabilities of $43,816 and contractual commitments of $24,883 due before the end of fiscal 2021. The Company’s existing cash and cash equivalents, short term investments and trade receivables are expected to provide sufficient liquidity to meet cash outflow requirements over the next twelve months. If required, the Company also has access to an additional $15,000 capacity on the Term Loan (Note 15), which is available to be drawn upon until November 30, 2020.

The Company’s success in executing on its longer term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.

The carrying values of cash and cash equivalents, trade receivables and accounts payable and accrued liabilities approximate their fair values due to their short-term to maturity.

17. General and Administrative Expenses by Nature

	For the three months ended						For the nine months ended
	April 30,			April 30,			April 30,			April 30,
	2020			2019			2020			2019
Salaries and benefits		$	2,633		$	1,616		$	8,657		$	4,999
Consulting			1,447			1,814			6,044			4,735
Professional fees			1,924			1,581			7,534			4,258
Facilities			1,996			1,990			5,398			4,443
General and administrative			2,947			2,859			11,284			3,818
Travel			291			635			1,916			1,319
Total		$	11,238		$	10,495		$	40,833		$	23,572

The following table summarizes the nature of share-based compensation in the period:

	For the three months ended						For the nine months ended
	April 30,			April 30,			April 30,			April 30,
	2020			2019			2020			2019
General and administrative related share-based compensation		$	5,941		$	7,395		$	21,543		$	16,557
Marketing and promotion related share-based compensation			230			767			694			1,254
Total operating expense related share-based compensation			6,171			8,162			22,237			17,811
Share based compensation capitalized to inventory			1,357			403			5,089			788
Total share-based compensation		$	7,528		$	8,565		$	27,326		$	18,599

20

The following table summarizes the total payroll related wages and benefits by nature in the period:

	For the three months ended						For the nine months ended
	April 30,			April 30,			April 30,			April 30,
	2020			2019			2020			2019
General and administrative related wages and benefits		$	2,633		$	4,059		$	8,657		$	9,292
Marketing and promotion related wages and benefits			1,148			1,318			3,796			3,555
Research and development related wages and benefits			513			398			2,226			398
Total operating expense related wages and benefits			4,294			5,775			14,679			13,245
Wages and benefits capitalized to inventory			3,991			2,200			17,317			7,324
Total wages and benefits in the period		$	8,285		$	7,975		$	31,996		$	20,569

18. Other Income and Losses

	For the three months ended						For the nine months ended
	April 30,			April 30,			April 30,			April 30,
	2020			2019			2020			2019
	$			$			$			$
Revaluation of financial instruments gain/(loss)		4,955			(1,121	)		7,966			(4,273	)
Share of loss from investment in associate and joint ventures		(1,195	)		(1,067	)		(4,468	)		(1,712	)
Loss on convertible debenture receivable		(212	)		(4,117	)		(3,253	)		1,862
Unrealized loss on investments		(311	)		(277	)		(8,535	)		(277	)
Realized loss on investments		(1,217	)		—			(1,444	)		—
Foreign exchange gain/(loss)		2,443			(39	)		3,017			(27	)
Interest and financing expenses		(3,279	)		(148	)		(7,312	)		(164	)
Interest income		353			1,242			1,239			3,612
Total non-operating income/(loss)		1,537			(5,527	)		(12,790	)		(979	)

19. Investment in Associate and Joint Ventures

				Belleville					Truss
For the nine months ended April 30, 2020	Truss			Complex Inc		HEXO MED			CBD USA		Total
	(a)			(b)		(c)			(d)
	$			$		$			$		$
Opening Balance		51,786			—		1,063			—		52,849
Cash contributed to investment		27,880			—		—			1,231		29,111
Fair value of warrant consideration		—			—		—			—		—
Capitalized transaction costs		—			—		—			109		109
Share of net loss for period		(4,175	)		—		(293	)		—		(4,468	)
Ending Balance		75,491			—		770			1,340		77,601
For the year ended July 31, 2019	Truss			Belleville Complex Inc		HEXO MED			Truss CBD USA		Total
	(a)			(b)		(c)			(d)
	$			$		$			$		$
Opening Balance		—			—		—			—		—
Cash contributed to investment		11,476			—		1,106			—		12,582
Fair value of warrant consideration		42,386			—		—			—		42,386
Capitalized transaction costs		721			—		125			—		846
Share of net loss for period		(2,797	)		—		(168	)		—		(2,965	)
Ending Balance		51,786			—		1,063			—		52,849

(a) Truss – Investment in Associate

During the three and nine months ended April 30, 2020, additional cash contributions totaling $6,800 and $27,880, respectively were made by the Company to Truss.

During the three and nine months ended April 30, 2020, the Company’s share in the net losses of Truss were $1,122 and $4,175 (April 30, 2019 – $1,067 and $1,712).

21

(b) Belleville Complex Inc. – Joint Venture

As part of the initial agreement, the Company will be the anchor tenant for a period of 20 years, with an option to renew for 10 years. On October 22, 2019, the lease agreement was amended to a 15-year anchor tenant period, with an option to renew for 15 years and additional space to rent. The Company has also subleased a portion of the space to Truss Limited Partnership (Note 21). As a result, the lease was reassessed resulting in an addition to the right-of-use asset and lease liability as well as a lease receivable on the sublease component (Note 26).

Consideration for the 25% interest on the joint venture is deemed $nil. The carrying value of BCI as at April 30, 2020 is $nil (July 31, 2019 - $nil).

(c) HEXO MED – Joint Venture

During the three months ended October 31, 2019, the Company’s interest in HEXO MED was increased to 51% upon the cash payment of the accrued EUR$500 ($729) as at July 31, 2019 due to a contractual milestone being met in June 2019. The carrying value of HEXO MED as at April 30, 2020 is $770 (July 31, 2019 - $1,063).

(d) Truss CBD USA LLC – Investment in Associate

On April 14, 2020, the formation of the entity Truss CBD USA LLC (“Truss US”) between the Company and Molson Coors Canada (the “Partner”) was finalized. Truss US is a standalone start-up entity with its own board of managers and an independent management team and is incorporated in the United States. Truss US is a limited liability company based out of the state of Colorado and its principal operating activities consist of pursuing opportunities for non-alcoholic, hemp-derived CBD beverages.

The Partner holds a 57.3% controlling interest in Truss US with the Company holding the remaining 42.7%. The investment is accounted for using the equity method. During the three and nine months ended April 30, 2020, cash contributions totaling $1,231 were made by the Company to Truss US.

During the three and nine months ended April 30, 2020, the Company’s share in the net losses of Truss were $nil (April 30, 2019 – $nil).

20. Long-term Investments

	Fair value										Fair value
	July 31,				Divestiture/			Change in			April 30,
	2019		Investment		Transfer			fair value			2020
	$		$		$			$			$
Level 1 Investments
Fire and Flower common shares		—		920		—			(300	)		620
Inner Spirit common shares		3,000		—		(644	)		(1,277	)		1,079
Level 2 Investments
Inner Spirit common share purchase warrants		403		—		—			(383	)		20
Level 3 Investments
Greentank Technologies		6,574		—		—			(6,574	)		—
Neal Brothers Inc.		4,000		—		—			—			4,000
Segra International Corp.		300		—		—			—			300
Total		14,277		920		(644	)		(8,534	)		6,019
	Fair value July 31, 2018		Investment		Divesture/ Transfer			Change in fair value			Fair value July 31, 2019
	$		$		$			$			$
Level 1 Investments
Fire & Flower Inc. common shares		—		2,970		(2,493	)		(477	)		—
Fire & Flower Inc. common share purchase warrants1		—		505		(262	)		(243	)		—
Inner Spirit common shares1		—		2,850		—			150			3,000
Level 2 Investments
Inner Spirit common share purchase warrants1		—		414		—			(11	)		403
Level 3 Investments
Greentank Technologies1		—		6,723		—			(149	)		6,574
Neal Brothers Inc. 1		—		4,000		—			—			4,000
Segra International Corp.		100		—		—			200			300
Total		100		17,462		(2,755	)		(530	)		14,277

¹ Acquired in the Newstrike acquisition on May 24, 2019 at fair market value

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Greentank Technologies

On February 22, 2019, Newstrike acquired 1,953,125 preferred shares of Greentank Technologies for cash consideration of $6,622 (USD$5,000). The investment initial fair value upon the acquisition of Newstrike was $6,723 and is measured through fair value through profit and loss. During the nine months ended April 30, 2020, the Company determined the fair value of the investment was $nil and was determined based on its recoverable amount. During the three and nine months ended April 30, 2020, the changes in fair value were $nil and $6,574, respectively (July 31, 2019 – ($149)).

21. Related Party Disclosure

Key Management Personnel Compensation

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Company’s operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and Board of Directors, and they control approximately 4.63% of the outstanding shares of the Company as at April 30, 2020 (July 31, 2019 – 6.15%).

Compensation provided to key management during the period was as follows:

	For the three months ended						For the nine months ended
	April 30, 2020			April 30, 2019			April 30, 2020			April 30, 2019
Salary and/or consulting fees		$	715		$	1,698		$	2,365		$	3,429
Termination benefits			427			—			427			—
Bonus compensation			—			113			42			328
Stock-based compensation			4,302			6,207			13,894			13,506
Total		$	5,444		$	8,018		$	16,728		$	17,263

These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties.

The Company leases a space in Belleville from the related party BCI (Note 19), that supports its manufacturing activities and is based in Belleville, Ontario. The Company paid $5,510 during the nine months ending April 30, 2020. This lease is recognized on the Company’s balance sheet under IFRS 16 (Note 26).

The Company subleases section of its Belleville lease to another related party Truss Limited Partnership (Note 19). The accrued charges on this lease amount to $380 during the nine months ended April 30, 2020. This sublease is recognized as a finance lease receivable on the Company’s balance sheet.

Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.

On April 28, 2020, the Company granted certain of its executives a total 900,000 stock options with an exercise price of $0.69. One-third of the stock options will vest on each of the one-year anniversaries of the date of grant over a three-year period.

On October 29, 2019, the Company granted certain of its executives a total of 829,034 stock options and 1,428,449 RSUs with an exercise price/unit value of $3.30. One-third of the stock options will vest on each of the one-year anniversaries of the date of grant over a three-year period. The RSUs vest in full on the third-year anniversary after the grant date.

The Company loaned $20,279 on September 7, 2018 to the related party BCI, to be used in the purchase of a facility in Belleville, Ontario, and was repaid in full during the period ended April 30, 2019.

22. Capital Management

The Company’s objectives when managing capital are to (1) safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and (2) maintain an optimal capital structure to reduce the cost of capital.

Management defines capital as the Company’s shareholders’ equity and interest-bearing debt. The Board of Directors does not establish quantitative return on capital criteria for management. The Company has not paid any dividends to its shareholders. The Company is not subject to any externally imposed capital requirements, with the exception of covenants related to the Company’s Term Loan as set out in Note 15.

As at April 30, 2020, total managed capital was $631,359 (July 31, 2019 – $788,712).

23. Commitments and Contingencies

COMMITMENTS

The Company has certain contractual financial obligations related to service agreements, purchase agreements, rental agreements and construction contracts.

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Some of these contracts have optional renewal terms that the Company may exercise at its option. The annual minimum payments payable under these obligations over the next five fiscal years and thereafter are as follows:

2020	$	8,666
2021		16,217
2022		4,543
2023		3,723
2024		3,372
Thereafter		20,385
	$	56,906

See Note 26 for recognized contractual commitments regarding the Company’s lease obligations under IFRS 16.

Letters of Credit

On August 1, 2019, the Company reissued a preexisting letter of credit with a Canadian financial institution under an agreement with a public utility provider entitling the utility provider to a maximum of $2,581, subject to certain operational requirements. The letter of credit has a one-year expiry from the date of issuance with an autorenewal feature and was still in effect as at April 30, 2020. The letter of credit has not been drawn upon as at April 30, 2020 (July 31, 2019 – $nil) and the Company is in compliance with the specified requirements as at the period end. As at April 30, 2020, the letter of credit is secured by a combination of the Company’s Revolving Loan (Note 15) and cash held in collateral.

On August 21, 2019, the Company entered into a five-year letter of credit with a Canadian financial institution to provide a maximum of $250 that amortizes $50 annually until its expiry on July 14, 2024. The letter of credit has not been drawn upon as at April 30, 2020. As at April 30, 2020, the letter of credit is secured by a combination of the Company’s credit facility (Note 15) and cash held in collateral.

On November 26, 2019, the Company entered into a six-month standby letter of credit with a Canadian financial institution to provide up to a maximum limit of $6,391, reduced by $1,000 on a monthly basis until fully amortized on May 30, 2020. The letter of credit has not been drawn upon as at April 30, 2020. As at April 30, 2020, the letter of credit is secured by a combination of the Company’s Revolving Loan (Note 15) and cash held in collateral.

Surety Bond

Effective July 3, 2019, the Company renewed its commercial surety bond with a North American insurance provider entitling the Company up to a maximum of $4,500. The bond bears a premium at 0.3% annually. The Company obtained the surety bond as required under the Canada Revenue Agency’s (“CRA”) excise tax laws for the transporting of commercial goods throughout Canada. On April 4, 2020 the Company renegotiated the surety amount with the CRA resulting in a reduced maximum of $1,700.

CONTINGENCIES

The Company may be, from time to time, subject to various administrative and other legal proceedings arising in the ordinary course of business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability can be reasonably estimated.

As of April 30, 2020, the Company is named as a defendant in securities class actions that have been filed in superior courts of the provinces of Quebec and Ontario and in the Supreme Court of the State of New York and the U.S. District Court for the Southern District of New York. One or more of the Company’s current and/or former officers and directors, and/or certain underwriters of past public offerings by the Company, are also named as defendants in certain of the actions. The lawsuits assert causes of action under Canadian and U.S. securities legislation and at common law, in connection with statements made by the defendants that are alleged to have been materially false and/or misleading statements and their alleged failure to disclose material adverse facts. The alleged misrepresentations relate to, among other things, the Company’s forward-looking information, including but not limited to the Company’s forecast revenues for Q4 2019 and fiscal 2020, its inventory, “channel stuffing” and the Company’s supply agreement with the Province of Quebec. As at the date hereof, the amounts claimed for damages in each of these actions have not been quantified. These actions are in a preliminary stage and have not yet been certified as class actions.

While the Company cannot predict the outcome of the actions discussed above, it intends to assert all available defences and vigorously defend these proceedings. Defending litigation, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. Further, the Company’s underwriting agreement with the underwriters contains contractual indemnification provisions that may require the Company to indemnify the underwriters with respect to the claims against them and their legal costs of defending the actions. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position, and the limits of available insurance may be insufficient to cover our eventual liability.

On January 24, 2020, the Company was served with a statement of claim commenced by a vendor in respect of a supply agreement that was purportedly entered into between UP Cannabis and the vendor prior to the Company’s acquisition of Newstrike on May 24,

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2019. The statement of claim filed against the Company is seeking payment of invoices alleged to be owing. In response, the Company filed a statement of defence and counterclaim on February 26, 2020. The supply agreement purports to contemplate that the Company would purchase certain cannabis products until February 2020. The Company intends to vigorously defend itself against such claim and intends to actively advance its counterclaim which alleges, among other things, that the supply agreement is void as it was entered into in bad faith.

ONEROUS CONTRACT

During the nine months ended April 30, 2020, the Company recognized a $3,000 onerous contract provision related to a fixed price supply agreement for the supply of certain cannabis products. The supply agreement is currently the subject of legal proceedings as disclosed above. The costs and purchase obligations under the contract exceed the economic benefits expected to be received. The related loss has been included in Other gains and losses.

24. Fair Value of Financial Instruments

The carrying values of the financial instruments as at April 30, 2020 are summarized in the following table:

	Note	Amortized costs		Financial assets designated as FVTPL		Financial liabilities designated as FVTPL		Total
Assets			$		$		$		$
Cash and cash equivalents			94,325		—		—		94,325
Restricted cash			17,383		—		—		17,383
Short-term investments			—		934		—		934
Trade receivables			16,820		—		—		16,820
Commodity taxes recoverable and other receivables			12,178		—		—		12,178
Convertible debenture receivable	14		—		399		—		399
Lease receivable – long term			4,548		—		—		4,548
Long – term investments	20		—		6,019		—		6,019
Liabilities			$		$		$		$
Accounts payable and accrued liabilities			26,736		—		—		26,736
Warrant liability	10		—		—		2,018		2,018
Lease liability – current			4,745		—		—		4,745
Lease liability – long term			25,132		—		—		25,132
Convertible debentures			48,715		—		—		48,715
Term loan	15		30,748		—		—		30,748

The carrying values of the financial instruments as at July 31, 2019 are summarized in the following table:

	Note	Amortized costs		Financial assets designated as FVTPL		Financial liabilities designated as FVTPL		Total
Assets			$		$		$		$
Cash and cash equivalents			113,568		—		—		113,568
Restricted cash			22,350		—		—		22,350
Short-term investments			—		25,937		—		25,937
Trade receivables			19,693		—		—		19,693
Commodity taxes recoverable and other receivables			15,247		—		—		15,247
Convertible debenture receivable	14		—		13,354		—		13,354
Long term investments	20		—		14,277		—		14,277
Liabilities			$		$		$		$
Accounts payable and accrued liabilities			45,581		—		—		45,581
Warrant liability	10		—		—		493		493
Deferred rent liability			946		—		—		946
Term loan	15		33,374		—		—		33,374

The carrying values of trade receivables, accounts payable and accrued liabilities and the term loan approximate their fair values due to their relatively short periods to maturity.

25. Non-Controlling Interest

The following table summarizes the information relating to the Company’s 60% ownership interest in Neal Up Brands Inc., before intercompany eliminations.

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	April 30, 2020				July 31, 2019
Current assets		$	2,500			$	2,500
Net assets			2,500				2,500
Non-controlling interest (%)			40	%			40	%
Non-controlling interest		$	1,000			$	1,000

Neal Up Brands Inc. has limited operations and the current assets represent cash held in escrow by a third party.

26. Lease Liabilities

The following is a continuity schedule of implicit lease liabilities for the nine months ended April 30, 2020:

	$
Balance as at July 31, 2019		—
Adjustment on adoption of IFRS 16 (Note 3)		21,360
Balance as at August 1, 2019		21,360
Lease additions		9,460
Lease payments		(3,196	)
Interest expense on lease liabilities		2,253
Balance as at April 30, 2019		29,877
Current portion		4,745
Long-term portion		25,132

The Company’s leases consist of administrative real estate leases and a production real estate property. The Company expensed variable lease payments of $895 and $2,818, respectively for the three and nine months ended April 30, 2020.

The following table is the Company’s lease obligations over the next five fiscal years and thereafter as at April 30, 2020:

Fiscal year	2020		2021 – 2022		2023 – 2024		Thereafter		Total
	$		$		$		$		$
Lease obligations		1,107		9,865		8,919		36,802		56,693

27. Revenue from Sale of Goods

	For the three months ended				For the nine months ended
	April 30, 2020		April 30, 2019		April 30, 2020		April 30, 2019
	$		$		$		$
Retail		29,781		14,607		71,014		34,593
Medical		774		1,323		2,655		4,146
Wholesale		340		—		340		—
Total revenue from sale of goods		30,895		15,930		74,009		38,739

Total revenue from the sale of goods is presented net of provisions for sales returns and price concessions. During the three and nine months ended April 30, 2020, the Company incurred $1,950 and $5,370, respectively (April 30, 2019 - $nil and $nil), of sales provisions and price concessions.

28. Segmented Information

The Company operates in one operating segment. All property, plant and equipment and intangible assets are located in Canada.

29. Restructuring Provision

	$
Balance payable as at July 31, 2019		—
Total restructuring costs		4,846
Less: payments made		(4,617	)
Balance payable as at April 30, 2020		229

During the nine months ended April 30, 2020, restructuring efforts were undertaken to right size the Company. These expenses amounted to $4,846 and are comprised of consulting services, severance and other payroll related termination costs.

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30. Changes in Non-Cash Operating Working Capital Items

The following items comprise the non-cash operating working capital items to be reflected through the Company’s operating cash flow activity for the periods herein.

For the six months ended	April 30, 2020			April 30, 2019
	$			$
Trade receivables		2,873			(11,009	)
Commodity taxes recoverable and other receivables		(1,479	)		(2,224	)
Prepaid expenses		5,170			(6,492	)
Inventory		(87,243	)		(35,433	)
Biological assets		22,168			26,309
Accounts payable and accrued liabilities		(1,866	)		7,172
Excise taxes payable		727			2,257
Total non-cash operating working capital		(59,650	)		(19,420	)

31. Income Taxes

The Company’s effective income tax rate was 1.57% for the nine months ended April 30, 2020. The effective tax rate is different from the statutory rate primarily due to the goodwill impairment and non-recognition of deferred tax assets.

32. Subsequent Events

COVID-19

In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in Wuhan, China. Since then, it has spread to several other countries and infections have been reported around the world. Canada confirmed its first case of COVID-19 on January 25, 2020 and its first death related to COVID-19 on March 9, 2020. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. In response to the outbreak, governmental authorities in Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions.

Subsequent to April 30, 2020, the COVID-19 global pandemic continues to unfold and could have an adverse impact on our business, operations and financial results, including disruptions in our cultivation and processing activities, supply chains and sales channels, as well as a deterioration of general economic conditions including a possible national or global recession. It is not possible to estimate its impact on our business, operations or financial results; however, the impact could be material.

EARLY CONVERSION OPTIONS FOR DEBENTURES

On May 18, 2020 the Company agreed with certain holders of $29,860 aggregate principal amount of the Company’s 8% unsecured convertible debentures maturing December 5, 2022 have accepted an opportunity offered by the Company to voluntarily convert all or a portion of their Debentures for Conversion Units (the “Early Conversion Option”).

The Company offered the Early Conversion Option to all holders of the $70,000 aggregate principal amount of the Debentures (the “Debenture holders”), subject to acceptance by Debenture holders (each an “Electing Debenture holder”) holding a minimum of $20,000 aggregate principal amount of the Debentures by May 17, 2020. The Early Conversion Option was limited to $30,000 aggregate principal amount of the Debentures being converted, with Electing Debenture holders for more than this maximum amount being limited to converting their pro rata portion of the $30,000 aggregate principal amount of Debentures to be converted.

Upon completion of the Early Conversion Option, Electing Debenture holders will receive for the principal amount of their Debentures to be converted, units of the Company (the “Conversion Units”) issued at a price of $0.80 per Conversion Unit, instead of Common Shares otherwise issuable on conversion of the Debentures at the existing conversion price of $3.16 per share or, at the option of the Debenture holders, at the market price at the time of maturity, in each case as currently provided for under the Debentures. Each Conversion Unit will consist of one Common Share (a “Conversion Share”) and one-half of one common share purchase warrant of the Company (each whole warrant, a “Conversion Warrant”). Each Conversion Warrant will be exercisable by the holder to purchase one Common Share (a “Conversion Warrant Share”) at an exercise price of $1.00 per share for a period of three years from issuance. The Conversion Shares will be subject to restrictions against resale for a period of one year from issuance as part of the terms of the Early Conversion Option. In addition, the Conversion Warrants and Conversion Warrant Shares will be subject to resale restrictions ending 4 months and one day from issuance of the Conversion Warrants under applicable securities laws. The implementation of the Early Conversion Option and the issuance of the Conversion Shares, Conversion Warrants and Conversion Warrant Shares is subject to the approval of the Toronto Stock Exchange and the New York Stock Exchange.

On June 10, 2020, the Company closed the conversion of $23,595 aggregate principal amount of Debentures as an initial closing of the early conversion option for $29,860 aggregate principal amount of Debentures. Under the initial closing, the $23,595 aggregate principal amount of Debentures was converted into 29,493,750 Conversion Units at a price of $0.80 per Conversion Unit. It is expected

27

that the balance of the early conversion option for the conversion of an additional $6,265 aggregate principal amount of Debentures will occur in the second half of June 2020.

$57.5M UNDERWRITTEN PUBLIC OFFERING

On May 21, 2020 the Company closed an underwritten public offering for the purchase and sale of 55,600,000 units and 8,340,000 over-allotment units. Each unit is comprised of one common share and one-half common share purchase warrant at an offering price of

$0.90 per unit. Gross proceeds from the offering were approximately $57,546 before deducting fees and other estimated offering expenses. The warrants have a five year-term and an exercise price of $1.05 per share.

ACCEPTANCE OF OFFER ON NIAGARA FACILITY

On May 25, 2020 the Company accepted an offer to sell the property and related assets for proceeds of approximately $10,250. The sale is expected to close before year end (Note 8).

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EX-99.2

Exhibit 99.2

Management’s Discussion & Analysis

Management’s Discussion & Analysis

For the three and nine months ended April 30, 2020

(In thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of HEXO Corp and our subsidiaries (collectively, “we” or “us” or “our” or “Company” or “HEXO”) is for the three and nine months ended April 30, 2020. HEXO is a publicly traded corporation, incorporated in Ontario, Canada. The common shares of HEXO trade under the symbol “HEXO” on both the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”). This MD&A is supplemental to, and should be read in conjunction with, our condensed consolidated interim financial statements for the three and nine months ended April 30, 2020 and our amended and restated audited consolidated financial statements for the fiscal year ended July 31, 2019. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. All amounts presented herein are stated in Canadian dollars, unless otherwise indicated.

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102, Continuous Disclosure Obligations, of the Canadian Securities Administrators. Additional information regarding the Company is available on our websites at hexocorp.com/investors or through the SEDAR website at sedar.com or the EDGAR website at www.sec.gov/edgar.

Certain information in this MD&A contains or incorporates comments that constitute forward-looking information within the meaning of applicable securities legislation. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as “may”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “continue”, “objective”, or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, projections or other characterizations of future events or circumstances; our objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to our plans and objectives; estimates or predictions of actions of customers, suppliers, competitors or regulatory authorities; and statements regarding our future economic performance, as well as statements with respect to:

• the competitive and business strategies of the Company;

• the intention to grow the business, operations and potential activities of the Company, including entering into joint ventures and partnerships and leveraging the brands of third parties through joint ventures and partnerships;

• the ongoing expansion of the Company’s facilities, its costs and receipt of approval from Health Canada to complete such expansion and increase production and sale capacity;

• the expansion of business activities, including potential acquisitions;

• the expected production capacity of the Company;

• the expected sales mix of offered products;

• the development and authorization of new products, including cannabis edibles and extract products (“cannabis derivatives”);

• the competitive conditions of the industry, including the Company’s ability to maintain or grow its market share;

• the establishment of the Company’s Truss ventures with Molson Coors and the future impact thereof;

• the establishment of the Company’s joint venture with QNBS P.C. (formerly Qannabos) for the Company’s Eurozone processing, production and distribution centre in Greece and the future impact thereof;

• the expansion of the Company’s business, operations and potential activities outside of the Canadian market, including but not limited to the U.S., Europe and other international jurisdictions;

• whether the Company will have sufficient working capital and its ability to raise additional financing required in order to develop its business and continue operations;

• the applicable laws, regulations and any amendments thereof;

• the grant, renewal and impact of any licence or supplemental licence to conduct activities with cannabis or any amendments thereof;

• the anticipated future gross margins of the Company’s operations;

• the performance of the Company’s business and operations;

• the Company’s ability to remain listed on the NYSE and the impact of any actions it may be required to take to remain listed; and

• the impact of the COVID-19 coronavirus pandemic on the operations of the Company.

Such statements are not historical facts but instead represent management beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond management control. We have based these forward-looking statements on our current expectations about future events and certain assumptions including, but not limited to:

• the Company’s ability to implement its growth strategies;

• the Company’s ability to complete the conversion or buildout of its facilities on time and on budget;

• the Company’s competitive advantages;

• the development of new products and product formats for the Company’s products;

2        MD&A

• the Company’s ability to obtain and maintain financing on acceptable terms;

• the impact of competition;

• the changes and trends in the cannabis industry;

• changes in laws, rules and regulations;

• the Company’s ability to maintain and renew required licences;

• the Company’s ability to maintain good business relationships with its customers, distributors and other strategic partners;

• the Company’s ability to keep pace with changing consumer preferences;

• the Company’s ability to protect intellectual property;

• the Company’s ability to manage and integrate acquisitions;

• the Company’s ability to retain key personnel; and

• the absence of material adverse changes in the industry or global economy.

Although the forward-looking statements contained in this MD&A are based on what we believe are reasonable assumptions, these assumptions are subject to a number of risks beyond our control, and there can be no assurance that actual results will be consistent with these forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements and information include, but are not limited to, financial risks; industry competition; general economic conditions and global events; product development, facility and technological risks; changes to government laws, regulations or policies, including tax; agricultural risks; supply risks; product risks; dependence on senior management; sufficiency of insurance; and other risks and factors described from time to time in the documents filed by us with securities regulators. For more information on the risk factors that could cause our actual results to differ from current expectations, see “Risk Factors”. All forward-looking information is provided as of the date of this MD&A. We do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by law.

This MD&A is dated June 10, 2020.

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Company Overview

HEXO is a vertically integrated consumer-packaged goods (“CPG”) cannabis company in Canada with global ambitions. The global cannabis market is estimated to reach $250 billion in the next 10 years¹. HEXO believes that in a few years a handful of companies will control a significant portion of the global market share, and that we are positioning ourselves to be one of these companies². We believe that having a strong foothold in operational excellence, executing at scale, growing low-cost high-quality cannabis, and becoming profitable in Canada is critical to attaining a successful global platform. Our presence covers over 95% of the Canadian population via most major Canadian markets, our governmental and private retail distribution agreements and five-year contract as a preferred supplier with Quebec’s Société québécoise du cannabis (“SQDC”). We continue to reinvest in our technology platform, focusing on the future of cannabis, and our proven ability to create new products and formulations that meet the increasing demands of the global cannabis consumer. With award-winning products such as Elixir, Canada’s first line of cannabis peppermint oil sublingual sprays, and decarb, an activated cannabis powder designed for oral consumption, hash and oil extract drops, we possess one of the cannabis industry’s top cannabis IP portfolio’s³ and are among the cannabis industry’s top innovators.

Our goal is to become a top global cannabis company with a leading market share in Canada. After establishing a strong presence within our home market of Quebec, we have expanded nationally. To date, we have sold over 31,378 kg of adult-use and medical cannabis to thousands of Canadians who count on us for safe and reputable, high-quality products. We have developed an extensive and award-winning product range, and gained valuable experience and knowledge, while serving our customers.

The Canadian cannabis industry has grown significantly since its inception, however there have been several changes in market conditions and assumptions which have created significant challenges for the legal market in Canada, and HEXO. Revenue growth in the Canadian market continues to be hindered by slower than expected store openings, particularly in Ontario, which is the most populous province in Canada. Pricing levels have continued to decrease since legalization and consumer sell through has been slower than expected. We have launched Original Stash, a value brand that is designed to combat the illegal market and increase our overall market share.

During the nine months ended April 30, 2020, we have strengthened our capital position by raising over $175,000 through public and private offerings. Based on the Company’s working capital as at April 30, 2020 and forecasted cash flows are expected to provide sufficient liquidity to meet cash outflow requirements through April 30, 2021. Please see “Financial Position - Liquidity and Capital Resources – Going Concern” in this MD&A, for a more detailed discussion.

We are currently dual listed on the TSX and the NYSE⁴ and in doing so have increased HEXO’s access to the United States and global investors.

We do not, and do not intend to, engage in direct or indirect business with any business that derives revenue, directly or indirectly, from the sale of cannabis, cannabis products in any jurisdiction where the sale of cannabis is unlawful under applicable laws. HEXO does not currently engage in any unlawful U.S. marijuana-related activities as defined in Canadian Securities Administrators Staff Notice 51-352 (Revised) - Issuers with U.S. Marijuana-Related Activities and will only do so in the future to the extent fully legal under all applicable U.S. federal or state laws.

Vision, Mission and Values

MISSION

To enhance people’s enjoyment of life by creating globally trusted brands of easy-to-use and easy-to-understand cannabis products.

VISION

To create branded, consistent, quick onset and offset cannabis experiences for sleep, sport, sex and fun delivered through a full range of “Powered by HEXO” products developed in-house and in partnership with Fortune 500 partners.

OUR VALUES

Execution - deliver on our commitments;

Collaboration - work towards our common goals, grow through radical and respectful honesty and share in our collective success;

¹  Source: Piper Jaffray research report dated January 8, 2019 entitled “Cannabis: Growing Legal Opportunities Drive Attractive Growth Outlook”.

²  Based on: (i) analyst commentary on the development of the cannabis industry in Canaccord Genuity Corp.’s report entitled “Cannabis Monthly, February 2019”, dated February 20, 2019; (ii) the example of how the alcohol industry developed and consolidated post-prohibition, general commentary and analysis about the adult-use cannabis industry to the effect that, as a similar regulated industry, it can be expected to develop and consolidate in a similar fashion, and evidence that this is currently the trend in the industry; (iii) the Company’s review of existing and developing cannabis sales by other licensed producers since the legalization of the adult-use cannabis market; (iv) the Company’s current position in the adult-use market and its belief as to its competitive advantages arising from: (A) being a market leader in Quebec, its expansion into other select markets in Canada particularly Ontario, and increasing market share of sales in those markets; (B) offering a selection of products at a variety of price points; (C) maintaining a competitive cost structure; and (D) its joint venture with Molson Coors.

³  Based upon a third-party report from August 1, 2019 to April 30, 2020 which compares the Company’s filed patents relative to its peers in the Canadian Cannabis market using public data.

⁴  On April 7, 2020 that the Company was no longer in compliance with the NYSE’s US$1.00 share price continued listing standard (the “Price Listing Standard”) as a result of the average closing price of its common shares on the NYSE falling below US$1.00 for a consecutive 30 trading-day period. See section ‘Non-Compliance with NYSE Listing Notification.’

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Innovation - innovate through our products and our business solutions. We take risks, learn, grow from failure and continuously strive for excellence; and

Integrity - do the right thing, for our people, our shareholders, our consumers, our community and our planet.

Strategic Priorities

Since inception, we have laid the foundation to be a world leader that serves both adult-use and medical cannabis markets. In everything we do – innovation, cultivation, production, product development, distribution – we exercise rigor which allows us to offer adult-use consumers and medical cannabis patients uncompromising quality and safety.

Our strategy is built on three pillars: operational excellence, innovation and market leadership. In striving to achieve operational excellence our immediate focus remains on effective demand planning and production. We continue to implement more effective techniques to streamline operations, lower production costs and drive meaningful improvements in yields as we renew focus on profitability. Our innovation department is actively working towards developing innovative products for the Canadian cannabis derivatives market. We plan to invest in even better, science-backed cannabis experiences and platform technology, as we continue to develop advanced ingredients formulations for use with our partners. To expand our market leadership, we will use our dominant position in our home province of Quebec to strengthen distribution in select markets across the country with our brands, Up, HEXO and Original Stash.

We have positioned ourselves to meet the Canadian cannabis beverage demand through Truss Limited Partnership (“Truss” or “Truss Beverage Co.”) our venture with Molson Coors Canada (“Molson Canada”). Through this venture, we expect to launch a full line of cannabis beverage and extract products “powered by HEXO”. In May 2020, the Veryvell^TM line of water-soluble cannabis extract drops were launched for public consumption across several Canadian provinces, representing Truss Beverage Co.’s first product offerings. The Veryvell^TM line consists of Exhale; a CBD dominant product, Tingle; a balanced 1:1 CBD/TCH product and Yawn; a THC dominant product. This product line utilizes a dosing cap to provide more control over dosage and offers a range of preferred experiences.

As at April 30, 2020 Truss continues working towards the launch of additional cannabis products, such as, ready to drink beverages into the cannabis 2.0 market and focusing on the ongoing development of its formulations and product branding initiatives. Together, with Truss, we continue to work towards finalizing the infrastructure required to bring operations fully online at our Belleville facility. Truss will operate out of a separate space at the Belleville facility in which it will create infused beverages, while HEXO will run production and transformation operations for the cannabis infusion of the beverages in its separate space in the Belleville facility. The operations will be conducted by HEXO (through the entity HEXO Cannabis Infused Beverages or “HEXO CIB”) under its license for the facility until Truss obtains its own separate license. We expect Truss to acquire the appropriate selling license under Health Canada within the next 9 months⁵, at which point sales and operations will transfer to Truss. We currently expect to begin introducing ready to drink beverages to the market during the second half of this fiscal year, subject to certain risk as outlined in “Risk Factors.” The operations of HEXO CIB contributed $487 in gross sales and an immaterial contribution to the net loss during the period.

During the period, the Company and Molson Coors Beverage Company (“Molson Coors”) created a second business venture, Truss CBD USA LLC (“Truss CBD USA”). The venture was conceived to explore opportunities for non-alcoholic, hemp-derived CBD beverages in the State of Colorado. Similar to the Company’s Truss Beverage Co. venture with Molson Canada, Truss CBD USA will be majority owned by Molson Coors and will operate as a standalone entity with its own board of directors, management team, resources and go-to-market strategy. All production and distribution for Truss CBD USA will be kept within Colorado state lines since it is one of a few states that has an established regulatory framework for hemp-derived CBD in food and beverages. Truss CBD USA will leverage the gained industry and manufacturing knowledge of our Canadian Truss Beverage Co. Canadian venture in its business. The State of Colorado has had legalized adult-use cannabis sales since November 2012 and possesses an already established regulatory framework for CBD products. The operations of Truss CBD USA were not material in the period.

We continue to believe in the potential of partnership opportunities in the cannabis space. Due to the length of time and level of complexity in developing arrangements under our Hub and Spoke model, we are now opening ourselves up to explore other types of

⁵  The assumption of a 9-month period to acquire licensing is derived through the Company’s internal expertise and historical experience in obtaining licensing from Health Canada.

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partnership opportunities with CPG companies. As this approach continues to evolve, we are looking forward to introducing new formulations into the cannabis market.

THREE STRATEGIC PILLARS

Operational Excellence

We have been cultivating cannabis for five years under the Cannabis Act of 2018 regulatory regime and its predecessor (“Cannabis Regulations”), growing and producing high-quality cannabis. We are constantly evaluating and updating our cultivating practices and technology to further drive efficiencies, improved yields and decrease costs.

We chose to initially locate in Gatineau, Quebec, because we believe the province offers the ideal conditions for cannabis production: an abundant supply of renewable electricity at competitive rates, combined with abundant water resources and the availability of skilled people. The conditions allow us to continue to focus on ensuring that we maintain our low-cost production and move towards achieving profitability in the Canadian market.

On the border of Canada’s two largest consumer markets, Quebec and Ontario, our main campus in Gatineau positions us in close proximity to three of the country’s major urban areas, Montreal, Ottawa and Toronto.

We have accumulated a strong and skillful workforce, as well as a top management group which provides cannabis-specific industry expertise and other relevant business knowledge derived from a variety of industries and markets. When Canadian cannabis industry conditions shifted, HEXO was one of the first companies to take action. In the fall of 2019, we pulled back our operating costs, made the difficult decision to reduce our workforce, and reassessed our capital priorities. Management is focused on increasing utilization in our operational assets.

HEXO GROUP OF FACILITIES

Purpose Built Manufacturing

We have designed our Belleville facility as a purpose-built manufacturing center. By using specifically designed automation and best in class cannabis technology to streamline our processes, we are focusing on long term cost reductions and improvements to our portfolio wide gross margins.

The centralized location of the facility, the Company’s first outside of Quebec, is ideally situated along primary shipping routes to distribute our products and fulfill commitments across Canada. The Belleville facility will act as the main development and processing facility for HEXO’s cannabis derivative products. This facility further delivers on our national expansion strategy and ensures necessary

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capacity for the manufacture of advanced cannabis products, including hash, vapes, non-alcoholic beverages, and other edible cannabis products.

The process of licensing the Belleville facility occurs in phases, with the first phase of licensing having occurred during the first quarter of fiscal 2020. This first phase allows for the processing of cannabis and sale of medical cannabis out of the first completed phase of the facility. The Company received approval of an amendment to the Belleville license for the ability to sell both dried adult-use cannabis and derivative products on May 29, 2020.

The following provides information about HEXO’s facilities:

Gatineau, Quebec	HEXO’s Gatineau, Quebec facility is its main cultivation facility, featuring 1,292,000 sq. ft. of greenhouse cultivation space and 10,000 sq. ft. of advanced automated manufacturing space on a 143-acre campus. The greenhouse space is comprised of a 7,000 sq. ft. greenhouse, a 35,000 sq. ft. greenhouse completed in 2016, a 250,000 sq. ft. greenhouse completed in June 2018 and a 1 million sq. ft. greenhouse completed in December 2018, known as Building 9 or B9. Except as noted below, the facility is licensed by Health Canada (Standard Cultivation, Standard Processing, Sale for Medical Purposes, (current license was amended during the period and was effective April 7, 2020 and expires April 7, 2023), and Research (current license effective October 25, 2019 and expiring October 25, 2024)) and fully operational.
	When construction on B9 started in January 2018, the initial budget for the facility was approximately $157,000 in construction costs and acquisition of production and transformation equipment for operations. It was expected construction of the facility would be completed in December 2018 and that it would be licensed by Health Canada and become operational soon thereafter in phases as internal fit up of various zones in the facility was completed post-construction and following inspections by Health Canada and subject to its then prevailing processing times. Construction of the facility was substantially completed, and a first phase of the facility was licensed in December 2018. A first harvest in this facility was completed in April 2019. Work continued in completing the fit up of additional zones and obtaining additional phased licensing.
	As of October 31, 2019, the fit up of the facility was substantially complete subject to ongoing work on the final 5th phase additional cultivation zone, additional fit up of shipping and packaging areas, administrative space and front of house space and ongoing and evolving modifications to the facility’s infrastructure for constant yield and production improvement. The budget had been revised down to approximately $132,000 through scaling back ancillary capital needs and equipment in order to help reduce capital spending within the first quarter of fiscal 2020.
	In October 2019, activities in 200,000 sq. ft. comprising the 5th phase of B9 were deferred by the Company as part of its cost-cutting measures. The construction of the 5th phase resumed during the second quarter of fiscal year 2020. During the third quarter of fiscal year 2020, the 5th phase construction was again put on hold in order to prioritize and allocate capital resources to align with current production and business initiatives. The finalization of the security system and lighting, along with other minor fit ups are required to have the final phase licensed and will resume in the fall of 2020.
	As at April 30, 2020 the approved budget remained at $132,000 and total costs incurred to date were approximately $130,350. The remaining approved budget is $1,650.
	As of the date of this MD&A, management is undergoing an assessment of revising the budget further to include an approximate additional $10,000 - $20,000 in fit-ups related to ongoing and evolving modifications to the facility’s infrastructure for constant yield and production improvement. The expected completion for the project is estimated in the first half of the fiscal 2021.
	As noted in in section ‘Going Concern’ the Company’s existing net working capital is expected to provide sufficient liquidity to meet cash flow requirements over the next twelve months. The Company’s success in executing on its longer-term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.
Brantford, Ontario	HEXO’s Brantford, Ontario facility is an additional cultivation facility, featuring 14,000 sq. ft. of indoor growing space on 1 acre of land, which was acquired through HEXO’s acquisition of Newstrike Brands Ltd. in May 2019. The facility was designed and engineered to permit pharmaceutical-quality management standards utilized by Canada’s pharmaceutical manufacturers to be used in the production of cannabis in all acceptable forms. The facility is fully licensed by Health Canada (Standard Cultivation, Standard Processing and Sale for Medical Purposes (current licence effective December 6, 2019 and expiring December 6, 2022)) and fully operational.

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Niagara, Ontario	HEXO’s Niagara, Ontario facility is an additional cultivation facility, featuring 455,000 sq. ft. of greenhouse cultivation space (once retrofitted) on 16.6 acres of land, which was acquired through HEXO’s acquisition of Newstrike Brands Ltd. The facility was previously an automated, modern “Dutch-Tray” 200,000 sq. ft. facility, and was undergoing retrofitting and expansion to 455,000 sq. ft. The facility is fully licensed by Health Canada (Standard Cultivation, Standard Processing and Sale for Medical Purposes (current licence effective November 29, 2019 and expiring March 29, 2021)). The facility is not currently operational and is held for sale as April 30, 2020.
	Operations at the facility were suspended by the Company in October 2019 as part of the Company’s cost-cutting measures to rightsize its operations given current market conditions and over-capacity in the market and with a view to profitability and sustainability.
	On March 2, 2020, the Company completed a strategic review of its cultivation capacity and made the decision to market the Niagara facility and the associated excess equipment for sale. On April 27, 2020 the Board of Directors approved the sale of the Niagara property. Subsequent to April 30, 2020, on May 25, 2020 the Company accepted an offer to sell the property and related assets for total consideration of approximately $11,000. The sale is expected to close before year end.
Belleville, Ontario	HEXO’s Belleville, Ontario facility is its planned Belleville facility for processing and manufacturing, distribution and product research and development, featuring 912,600 sq. ft. of leased commercial space within a larger approximately 1.5 million sq. ft. industrial facility6, with rights of first offer and first refusal to lease the remaining space in the facility. The facility is planned to be the Company’s main production facility for processing, extraction and packaging, research and development and the manufacture of ancillary cannabis products. The Company’s venture, Truss is planned to operate at this facility, including under HEXO’s license until Truss obtains a separate license from Health Canada. The facility is owned by Belleville Complex Inc., 25% of which is owned by the Company and the balance of which is owned by Olegna Holdings Inc. a company affiliated with a director of the Company, Vincent Chiara. The Company has subsequently increased its leased space in the facility to 912,600 sq. ft. and subleased 183,600 sq. ft. to Truss.
	The Belleville facility is licensed by Health Canada (Standard Processing and Sale for Medical Purposes (current licence effective October 25, 2019 and expiring October 5, 2020)) and operations commenced there in November 2019 for certain packaging activities permitted by this licence. HEXO has applied for an amendment to the licence to authorize non-medical sale of additional cannabis product types, including derivative products. This process is subject to an inspection by Health Canada. The separate site licensing amendment is dependent on completion of certain additional construction work for additional fit-ups required for the activities associated with this licensing and is subject to then prevailing Health Canada processing times. HEXO previously expected to obtain this amendment in or around April 2020, due to the impact of COVID-19 there were some delays in this process, ultimately the amendment was received on May 29, 2020. Following this are final phases of the facility’s fit up and equipment installation and modification will occur, which is expected to be completed in the later half of fiscal 2020.
	When construction on the Belleville facility started in January 2019, the initial budget for the facility was approximately $188,000 in improvements and acquisition of production and transformation equipment for operations. It was expected construction of the facility would be completed in April 2019 and that it would be licensed by Health Canada and become operational soon thereafter in phases as internal fit up of various zones in the facility was completed post-construction and following inspections by Health Canada and subject to its then prevailing processing times. Construction of the facility was substantially completed and the initial licensing of the facility was obtained in October 2019.
	As at October 31, 2019, approximately $68,164 had been incurred and the budget had been revised to approximately $112,729 in the prior quarter as the Company scaled back the facility’s receiving/storage space, processing rooms and staff support/office area for savings of $70,000. An additional $5,000 was added to the budget to accommodate the new strategy of Truss operating under HEXO’s license within the facility until Truss obtains a separate license. Accordingly, as at October 31, 2019, budgeted expenditures of approximately $44,565 remained to bring the facility to a position for non-medical sales and derivative product sales licensing, as well as operational efficiency and improvement needs which do not necessarily correlate to the licensing timeline of the facility.
	As of April 30, 2020, our research amendment application for this site is with Health Canada for review and assessment. This amendment will allow for the development of edible products, increased research capacity and improve related intellectual property development at the site
	As at April 30, 2020 the approved budget remained unchanged at $112,729. and total costs incurred were approximately $101,527. Additional fit-ups are being considered in the range of $8,000 - $18,000 to accommodate the Company’s new range of products under cannabis 2.0. The remaining budget is $11,202 to bring the facility to a position for non-medical sales and derivative product sales licensing, as well as operational efficiency and

⁶  Initially configured as a 2 million sq.ft. facility, subsequently, remodeled down to approximately 1.5 million sq.ft.

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	improvement needs which do not necessarily correlate to the licensing timeline of the facility. The project is expected to be completed in the later half of fiscal 2020.
	As noted in in section ‘Going Concern’ the Company’s existing net working capital is expected to provide sufficient liquidity to meet cash flow requirements over the next twelve months. The Company’s success in executing on its longer-term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.
Montreal, Quebec (distribution)	HEXO’s Montreal Quebec distribution facility is a warehouse and distribution centre, featuring 58,000 sq. ft. of leased commercial space. The facility serves as a warehouse and distribution centre for Quebec adult-use webstore orders for the SQDC, which are managed for the SQDC by HEXO and Metro Supply Chain Group Inc. It houses product from all the licensed producers who have contracts with the SQDC and serves as the sole distribution point for all direct-to-consumer shipments within the Province of Quebec for orders placed through the SQDC online webstore. This facility is fully operational, having commenced operations in October 2018. This facility is regulated by the SQDC and does not require licensing by Health Canada.
Vaughan, Ontario	HEXO’s Vaughan, Ontario facility is its planned cannabis research laboratory for the development of edible products and related intellectual property, featuring 14,200 sq. ft. of leased commercial space. The build out of this facility, which includes a sensory testing area and a complete commercial kitchen is expected to be completed in the fourth quarter of fiscal 2020. The major remaining activity to complete the facility is the installation of the security system. Total estimated construction costs for the facility are approximately $1,118. The facility is not yet licensed by Health Canada. Licensing of the facility by Health Canada is dependent on completion of construction and Health Canada inspection and is subject to then prevailing Health Canada processing times. As at April 30, 2020, approximately $774 of capital expenditures were incurred, leaving an approximate remaining budget of $344.
Montreal, Quebec (research)	HEXO’s Montreal, Quebec research facility is its planned general research and development laboratory for advanced cannabis platforms (i.e., products and methods of consumption), featuring 19,600 sq. ft. of leased commercial space. The build out of this facility is expected to be completed in August 2020, delayed from May 2020 due to the impact of COVID-19. Total estimated construction costs for the facility are approximately $611. The facility is not yet licensed by Health Canada. Licensing of the facility by Health Canada is dependent on completion of construction and Health Canada inspection and is subject to then prevailing Health Canada processing times. As at April 30, 2020, approximately $100 of capital expenditures have been incurred as material activities begin, leaving an approximate remaining budget of $511.
Ottawa, Ontario	HEXO leases approximately 40,036 sq. ft. of office space in Ottawa, Ontario for its corporate head office.

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Innovation

Empowering the world to have safe and pleasurable cannabis experiences powered by HEXO technology.

Our strategic priorities reflect our belief that companies that achieve large-scale distribution and high brand awareness will drive long-term shareholder value in our industry. We aim to be the best partner for provincial cannabis distribution and retail authorities, while being recognized for delivering our “powered by HEXO” experiences across the full spectrum of products, price points and delivery methods.

Our focus on research, innovation, technology and product development also reflects our strategic priorities. Our Innovation team benefits from experiences in CPG innovation and is actively exploring ways to increase our expertise related to cannabis applications and forms of delivery, and to expand our product range.

During the period, HEXO launched its first derivative product, Original Stash OS.Hash10 in March 2020, followed shortly after by OS.Hash20. Subsequent to the quarter ended April 30, 2020, our first vape products, a line of disposable single strain, high quality THC pens were made available to select markets in early May 2020. Also, in mid June 2020, our first reusable vape cartridge products are launching across select provinces.

We continue to prepare to take advantage of opportunities in the cannabis derivatives market and are looking forward to launching more new products throughout calendar 2020. Products that we intend to introduce include, but are not limited to edibles, and non-alcoholic beverages through our venture Truss Beverage Co, with partner Molson Canada. We plan to add additional product offerings to the current and future cannabis 2.0 product portfolio over time.

Through HEXO’s proven innovation capability and quality cannabis that the current adult-use market has come to expect, this new platform for cannabis derivative products offers us the ability to target curious new adult-use clientele and attract consumers who may otherwise purchase cannabis from unlicensed dispensaries and black market participants. We will do this by offering legal, safe, consistent, tested and appealing product options.

We established the venture Keystone Isolation Technologies Inc. (“KIT”) of which HEXO holds a 60% interest. Through KIT we believe we have obtained high capacity, top echelon technology for cleaning cannabis and hemp of harmful pesticides, and isolating cannabinoids, which we believe gives us an edge in bringing quality extracts to our potential partners. We believe KIT will provide the Company with high quality extraction technology to facilitate an efficiently processed and consistent supply of CBD and THC to supply the Canadian and global market for cannabis derivatives.

To date the Company has filed 56 patent applications focused on devices, formulations, packaging and processing. The cannabis industry has already recognized us as an innovative leader, as demonstrated by our award-winning products Elixir and decarb.

Beyond the funds required for our currently planned investments in cultivation, distribution and processing capacity, we expect to allocate the majority of our capital to product innovation, development and production. An element of this focus is the development of our Belleville, Ontario facility, which, once fully-licensed, will house manufacturing and distribution for the Company and its future products, as well as the operations of Truss Beverage Co. Full licensing of this facility is dependent on completion of construction and Health Canada inspection and is subject to then prevailing Health Canada processing times. The facility has received its first license, which permits certain packaging activities, and the Company is awaiting an amendment to this license to manufacture edible products. This approach will directly support our continued leadership position in the Canadian cannabis market – as both a distributor and a product innovator.

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Innovation and Trim Management

We have established a trim management initiative to drive up trim utilization and also systematically reduce this inventory on hand. Cannabis trim is the by-product of the harvesting process in which the flower is removed from the plant along with other extraneous plant matter. This on hand inventory is being used as the primary input in the manufacturing of our Original Stash hash products. During the fiscal year we have invested in improving our cultivation processes and increased the potency (content of cannabinoids within the plants) of our flower and trim. Historically, the buildup of trim in inventory lead to increased cost of sales and decreased gross margin due to limited value adding options for trim usage. Thus, the effort in tactically reducing our trim inventory is aimed to normalize these metrics. Going forward, trim will be the source of serval cannabis 2.0 value added cannabis products like our OS.Hash, pre-rolls and more.

Medical Innovation

Since our inception as a medical cannabis company, through to the legalization of adult-use cannabis in October 2018, we have prided ourselves on our dedication to serving the medical market and its clientele. Recently, we have continued this dedication through the launch of our new 30g, odour-proof and child-resistant pouch packed, dried flower product offering. Initially offered in our long-time favourite, Tsunami – a Northern Berry indica and features a strong THC potential of 20% – 26%. Offering our quality dried flower in the 30g (as mandated by Health Canada, a medical cannabis authorized patent is allowed the lesser of 150 grams or a 30-day supply of dried cannabis (or the equivalent in cannabis product) in addition to the 30 grams allowed for adult-use purposes) packaging format ensures our clients an easy and efficient alternative to obtain their medical cannabis.

Market Leadership

We believe the initial years following legalization will be the most critical in determining the future shape of the cannabis industry in Canada and that early distribution and financial performance will be critical to securing a market position. Given the different regulations governing the sale of adult-use cannabis across Canada, the number of large-scale licensed producers and continuously evolving Canadian cannabis economy’s supply and demand conditions, among other factors, make it clear that market penetration and brand awareness are essential during these formative years in Canada’s cannabis industry.

For this and other reasons, we have deliberately set out to build a strong position in our initial jurisdiction, Quebec, while making strategic inroads in select other markets across the country through provincial supply agreements and arrangements. The Company now holds supply agreements and arrangements across ten provinces.

We believe that by offering a diverse house of brands that resonate with consumers across market segments, representing innovation, quality and consistency of experience, we will obtain a leading Canadian market share.

HOUSE OF BRANDS

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Canadian Cannabis Landscape

RETAIL DISTRIBUTION CHANNELS BY PROVINCE AND TERRITORY

All provinces and territories have established their respective cannabis market retail approach, ranging from private entities to government-owned retail, as well as a combined approach in several jurisdictions. We have positioned ourselves through supply agreements and arrangements for distribution within all ten provinces of Canada.

IMPACT OF COVID-19 ON RETAIL DISTRIBUTION CHANNELS

In December 2019, the novel strain of coronavirus known as COVID-19 emerged in Wuhan, China. Since then, it has spread to several other countries and infections have been reported around the world. Canada confirmed its first case of COVID-19 on January 25, 2020 and its first death related to COVID-19 on March 9, 2020. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. In response to the outbreak, governmental authorities in Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing.

In the cannabis industry, provincial governments have had to respond to the COVID-19 pandemic by determining if the sale of cannabis would be deemed as an essential service and under which mediums (instore and/or online) cannabis could be sold. A range of responses have occurred, as outlined below.

Quebec – The Quebec government deemed the SQDC as an essential business and therefore both instore and online sales options remain available to the public. The SQDC has indicated that it has experienced an increase in sales during the early stages of the pandemic but did not provide public insight over the quantitative aggregate increase in province wide sales⁷. However, recent publications have reported increased sales in Quebec during the month of March of 29.1%, month over month⁸. The SQDC had also previously announced plans to double its number of stores which may now be delayed due to COVID-19. The SQDC has stated there have been no issues with product supply in-store or online.

Ontario – The Ontario government initially listed cannabis retailers an essential service. On April 5, 2020, Ontario removed cannabis retail stores from the essential workplace list and ordered store closures for at least two weeks. On April 7, 2020 Ontario then partially reversed this order by granting authorization to cannabis retailers to offer delivery and curbside pick-up services; which remains in place as at the date of this MD&A. Although initial signs of increased sales were presumed to be due to the stock piling cannabis, data from the Ontario Cannabis Store (“OCS”) shows positive signs of the increased demand being longer term⁹ and realized sales increases of 20.6% in March 2020, month over month⁹. The government is placing a temporary pause on the issuance of retail store authorizations until the emergency order over retail store closures has ended.

Alberta – The Alberta government established that cannabis retail outlets and operations of the Alberta Gaming, Liquor and Cannabis agency (“ALGC”) are considered essential businesses. There have been no impacts to the ALGC or retailer’s cannabis supply chains to date¹⁰.

British Columbia – Similar to Alberta, the British Columbia government has classified cannabis retailers (both privately held and publicly held by the British Columbia Liquor Distribution Branch (“BCLDB”)) as an essential service. Some private retailers have however voluntarily temporarily shut down their stores to the public as a precaution in response to COVID-19.

East Coast Markets – Nova Scotia’s government responded with a reduction of in store hours, aside from this, the market has remained unaffected. New Brunswick has limited the number of customers in stores and offers online click and pick shopping. Newfoundland and Labrador also remained open, however several private retails voluntarily closed for precautionary purposes. Finally, Prince Edward Island continued offering online sales and has temporarily closed its brick and mortar locations.

⁷  Source: Global News news article dated March 16, 2020 entitled “Ontario and Quebec cannabis distributors see sales spike amid COVID-19 pandemic”.

⁸  Source: Cannabis retailer article dated May 26, 2020 entitled “Retail Sales rose 19.2% in March 2020”.

⁹  Source: BNN Bloomberg news article dated April 16, 2020 entitled “Cannabis Canada: Pot purchases remain strong in Ontario despite COVID-19, OCS data shows”.

¹⁰  Source: aglc.ca/covid-19.

14        MD&A

THE COMPANY’S DISTRIBUTION BY PROVINCE AND BRAND

* As at the report date, Up is listed but not currently available in the provinces; BC, AB, MB, SK, ON, QC and NFLD.

Update on Quebec

The Company has a five-year supply contract with the SQDC. During the first-year post-legalization, HEXO sold approximately 10 tonnes of cannabis under this contract, achieving an estimated 33% market share in Quebec based on volume sold and sell through data provided by the SQDC, in line with our market share goal. Although total sales for the first year did not reach the 20 tonnes originally expected under the contract, our actual sales relative to expectations were proportionate to total sales by the SQDC, which only had initial sell-through in year one of roughly half of the total amount it had expected to purchase for all licensed producers. While the Company had a right under the contract to require the SQDC to purchase the full 20 tonnes of the outstanding commitment during the first year of the agreement ¹¹, the Company did not seek to enforce this right on the belief that it would be short sighted given the general results in the industry and the SQDC’s initial sell-through and from the perspective of its overall business relationship with the SQDC and its position in Quebec¹². While HEXO did not achieve the expected volume for year 1, HEXO met its goal of achieving a premiere market share in Quebec and remains a preferred supplier to the SQDC.

While we continue to strive towards maximizing our annual sales with the SQDC, as of the date of this MD&A, based on current market conditions which include but are not limited to, fewer brick and mortar SQDC stores than originally scheduled for initial rollout and evolving and more restrictive provincial regulation over cannabis consumption, we no longer expect to achieve the previously anticipated 35 tonnes in the second year of legalization under our contract with the SQDC, and if these conditions continue, we expect we will not likely achieve the previously anticipated 45 tonnes in the third year of legalization under our contract with the SQDC either. As previously disclosed by the Company, both of these amounts are non-binding targets and there are no requirements for the SQDC to purchase these amounts. Until there is greater clarity and stability of market conditions, it is difficult for the Company to predict with any degree of certainty what sales levels may be expected or achieved. In any event, we remain a preferred supplier of the SQDC as we continue to expand our product offerings and achieve maximum sales based on the demands of consumers, maintain market leadership and the current and evolving market. We currently supply the SQDC with HEXO and Original Stash brand products.

In addition, and separate from the five-year supply contract we have with the SQDC, we hold a distribution agreement with the SQDC under which we manage, with Metro Supply Chain Group Inc., the warehouse and distribution of products from all licensed producers who have contracts with the SQDC for all direct-to-consumer shipments within the Province of Quebec for Quebec adult-use orders placed through the SQDC’s online webstore. In consideration for its services in managing the warehouse and distribution of these products under the agreement, the Company earns management fees from the SQDC, which are reflected as ancillary revenue in our financial statements.

¹¹  Further to the disclosure in the Company’s press release dated April 11, 2018 announcing the contract, the Company’s amended and restated short form base shelf prospectus dated December 14, 2018 and the Company’s annual information form dated October 28, 2019 for the year ended July 31, 2019.

¹²  By amendment effective on January 17, 2020, the Company contractually relieved the SQDC of the 1st year obligation to purchase the full 20 tons of the outstanding commitment.

15        MD&A

HEXO US

The Company established its wholly owned U.S. based entity HEXO USA Inc (“HEXO US”) on May 19, 2019, to facilitate expansion into the US market.

We believe that strategic partners will be able to benefit from HEXO’s innovative product development, advanced research and development, intellectual property portfolio (pending patent approvals), low production cost, licensed infrastructure and regulatory know-how. These same strategic partnerships will provide the Company with established global distribution platforms and product expertise.

The Company is aiming to enter select U.S. states over the course of the next calendar year and is taking important strides to offer its “powered by HEXO” products through KIT and our future partners, to the U.S. CBD markets, to the extent that such activities fully comply with applicable U.S. federal and state laws, including U.S. Food and Drug Administration requirements. Our first entry was gained in April 2020, through the creation of our Truss CBD USA venture in the State of Colorado with partner Molson Coors (see the section - Strategic Priorities.

The Company does not currently have and is not in the process of developing marijuana-related activities in U.S., even in U.S. states where such activity has been authorized within a state regulatory framework. As such, the Company is not and would not be considered in the future a “U.S. Marijuana Issuer” within the meaning set forth in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities.

HEXO MED

In October, 2018 the Company formed HEXO Med S.A (“HEXO MED”) a joint venture with QNBS P.C. in Greece for the development of a 350,000 sq. ft. license facility that would be used for the manufacturing, processing, and distribution of medical cannabis products, “powered by HEXO”, destined for the European market. While HEXO MED received its European medical cannabis license in June 2019, plans have not been finalized for the development and construction of the manufacturing facility. Given the current capital obligations of the Company, any further funding from the Company has been placed on hold and HEXO MED is currently seeking independent financing which may decrease the Company’s ownership interest.

Corporate Restructuring

Early in the current fiscal year, the Company initiated a comprehensive evaluation of its operations in order to adjust to the new economic conditions of the Canadian cannabis industry. As a result, the Company began rightsizing its operations to adjust to this evolving market and regulatory environment with a view towards profitability and long-term stability. As a part of these changes to its operations, the Company has eliminated approximately 200 positions across all departments and locations and activities were suspended by the Company at the Niagara facility (which is currently expected to be sold before the end of the fiscal year) and in 200,000 sq. ft. comprising the final 5^th phase of B9 at the Gatineau facility. The actions taken are intended to rightsize the organization to align with the revenue the Company expects to achieve in fiscal 2020. The Company continues to monitor the changing Canadian cannabis economic landscape whilst implementing its new budgetary and operating initiatives for fiscal 2020, in attempts to meet its goal of a positive Adjusted EBITDA in the first half of fiscal 2021 (see material assumptions in the section “Outlook”).

HEXO and COVID-19

As noted above, in December 2019, the novel COVID-19 coronavirus emerged in Wuhan, China and has subsequently spread to several other countries around the world. Canada confirmed its first case of COVID-19 on January 25, 2020 and its first death related to COVID-19 on March 9, 2020. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. In response to the outbreak, governmental authorities in Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions. The continued spread of COVID-19 nationally and globally could have an adverse impact on our business, operations and financial results, including through disruptions in our cultivation and processing activities, supply chains and sales channels, as well as a deterioration of general economic conditions including a possible national or global recession. The Company has assessed the impact of the virus on its current operations and has disclosed the impact accordingly within this MD&A.

HEXO’s operations are split between Quebec and Ontario. Both provinces have deemed cannabis licensed producers as essential. Due to our geographical location there is a general a requirement for our Ontario based employees to travel to Quebec and vice versa, which is permitted under the travel restrictions imposed upon the Quebec/Ontario boarder. We therefore remain operational and vigilant to continue delivering our products in a safe and reliable manner to our partners and consumers.

People

In response to the pandemic we established a COVID-19 response team was established and tasked to manage the Company’s information flow of COVID-19 updates, review public health and safety protocols as outlined by the appropriate governmental authorities and develop in house action plans to mitigate these risks and comply accordingly. We have transferred all functions which can do so, to work from home and operate purely from stay at home, web-based/teleconferencing platforms. For those functions which

16        MD&A

require to remain ‘on site’ from day one we increased our focus on social distancing, additional personal sanitation stations and through full personal safety equipment such as gloves and masks, as well as, additional hand sanitizing stations throughout our manufacturing and administrative facilities. We have implemented travel restrictions for work related travel where deemed unnecessary and restricted visitor access to our facilities. We implemented mandatory 14-day quarantines for all workers returning from vacations or out of country visits during the onset of the pandemic. We initiated a program ‘Hero Pay’ to support our cultivation and manufacturing employees who continue to work during the pandemic.

Community

As a part of our continued goal of social responsibility, in response to the need for personal safety N95 masks for front line public health workers we have donated excess masks to Outaouais paramedics and the Quinte Health Authority.

Operations

During the period, we performed a full review of all Health & Safety Standard Operating Procedures with specific focus on personal protective equipment as a result of the COVID-19 outbreak. We implemented protocols in early March 2020 that exceeded government health authorities’ recommendations. Throughout March and April 2020, HEXO continued to hire planned full-time roles both in the direct labour and skilled labour fields. Furthermore, in light of the pandemic, we continued to reduce our cloning activity in the cultivation process which was underway as apart of our inventory rightsizing initiative and also allowed for a minimization of the number of employees required to be onsite. This will result in a reduction of harvest volume expected to be realized in Q1 of fiscal 2021. HEXO’s operations have felt a very minimal impact to the overall operation and volumes were unimpacted by COVID-19 related issues. We do not foresee any impact to supply to the market. Thus, during this pandemic, we continue to cultivate, manufacture and produce the same high-quality cannabis products the market has come to expect.

Distribution

As discussed in the section “Impact of COVID-19 on Retail Distribution Channels”, , most provincial bodies have deemed cannabis retail as an essential service. As such our provincial distribution remains relatively unimpeded. It remains uncertain as to whether COVID-19 will ultimately increase or diminish demand and sales of cannabis across Canada, however, we continue to work with provincial and private entities towards the goal of penetrating deeper into all markets and allow for the public to safely and reliably consumer our products.

Supply Chain

On a day-to-day basis, we continually monitor the economic response to COVID-19 and work together with our valued supply chain partners in order to mitigate various potential disruptions to our operations. Currently, there appears to be minimal indicators of material issues to our supply chain.

Liquidity

At the date of this MD&A management believes that we possess sufficient resources and capital to meet the continuing COVID-19 health requirements in order to remain operationally compliant with the healthy authorities mandated regulations and to meet ongoing working capital requirements from operations, maintain compliance with existing debt covenants, fund budgeted capital projects, and launch additional revenue streams.

Due to the speed with which the COVID-19 situation is developing and the uncertainty of its magnitude, outcome and duration, it is not possible to estimate the future impact on our business, operations or financial results; however, the impact could be material.

Corporate Social Responsibility

At HEXO, our goal is to be one of Canada’s leading cannabis producers and processors. We know that if we want to achieve our goal, we need to think about more than just our products and prices. We must also examine the way our operations impact the natural and social environment on a local, provincial and national level. HEXO is monitoring and reporting on its greenhouse gas emissions, setting targets to reduce them, and offsetting its footprint. We will also be reporting on other Environment, Social and Governance (ESG) impact areas based on Global Reporting Initiatives (GRI) standards. Our Corporate Social Responsibility Charter focuses on four priorities: People, Public, Products and Planet.

Other Corporate Highlights and Events

Director Resignation

On February 6, 2020, Nathalie Bourque resigned as a director of the Company.

Amendment of FY 2019 and Q1 2020 MD&As

On March 19, 2020, the Company amended and refiled its management’s discussion and analysis for the fiscal year ended July 31, 2019 and its management’s discussion and analysis for the three month period ended October 31, 2019 (collectively, the “Amended MD&A”) to better comply with National Instrument 51-102 - Continuous Disclosure Obligations. The Amended MD&A were prepared by the Company following a continuous disclosure review by the Ontario Securities Commission (the “OSC”) of the Company’s disclosure record. The Amended MD&A were filed to address comments received from OSC Staff and in order to improve the Company’s disclosure. In particular among other changes, the Amended MD&A were revised:

17        MD&A

• to clarify and provide additional disclosure about the Company’s facilities including its plans for the facilities, the status of facilities including construction and licensing, and incurred and expected additional capital expenditures in respect of the facilities;

• to clarify and provide additional disclosure regarding the Company’s impairments and write-offs of inventory, including related events, risks, and uncertainties that the Company reasonably believes may materially affect its future performance;

• to clarify and provide additional disclosure regarding the Company’s supply contract with the “SQDC” including details of the Company’s right under the contract for the sale of 20,000kg to the SQDC during the first year of the contract;

• to provide additional disclosure about how the Company has used proceeds from certain financings;

• to clarify and provide additional disclosure regarding the Company’s use of non-IFRS financial measures; and

• to clarify that the suspension of operations at the Company’s Niagara, Ontario facility in October 2019 was completed, as previously disclosed by the Company, as part of its cost-cutting measures to right-size its operations given current market conditions and over-capacity in the market and with a view to profitability and sustainability.

The amended information relates only to the management’s discussion and analysis for the relevant periods, and no changes were made to the financial statements for the corresponding periods.

Non-Compliance with NYSE Listing Notification

On April 7, 2020, the NYSE notified the company that it was no longer in compliance with the NYSE’s US$1.00 share price continued listing standard (the “Price Listing Standard”) as a result of the average closing price of its common shares on the NYSE falling below US$1.00 for a consecutive 30 trading-day period. The issuance of the notification was not discretionary and is sent automatically when a listed company’s share price falls below the Price Listing Standard. On April 24, 2020, the company confirmed to the NYSE its intention to implement remedial measures to bring its share price and average share price back above $1.00 by no later than the revised cure date of December 16, 2020

Under the NYSE’s rules, the Company can regain compliance with the Price Listing Standard and avoid delisting if, within six months from the date of the NYSE notification, its common shares have a closing price on the last trading day of any calendar month and a concurrent 30 trading day average closing price of at least US$1.00 per share. If the Company has not regained compliance by the end of this six month cure period, the NYSE will commence suspension and delisting procedures. In response to the COVID-19 outbreak, the NYSE made a rule filing with the SEC which became effective on April 21, 2020 for relief on the Price Listing Standard which provides for an extension of the cure period until June 30, 2020. As a result of this ruling filing, the Company currently has until December 16, 2020 to restore compliance with the Price Listing Standard. The Company expects to restore compliance with the Price Listing Standard, and to continue to maintain access to a broad range of investors, equity capital and trading liquidity through its NYSE listing. The Company is considering options to regain compliance, which may include a share consolidation, if necessary. The Common Shares will continue to be listed and traded on the NYSE during the applicable cure period, subject to continued compliance with the NYSE’s other continued listing standards, under the symbol “HEXO”, but the NYSE has assigned a “.BC” indicator to the symbol to denote that the Company is below the NYSE’s Price Listing Standard. This indicator will be removed at such time as the Company is deemed compliant with the NYSE’s Price Listing Standard.

Non-compliance with the Price Listing Standard does not affect the Company’s business operations or its reporting requirements to any securities regulatory authorities, nor does it affect the continued listing and trading of the Common Shares on the Toronto Stock Exchange or breach or cause an event of default under any of the Company’s agreements with its lenders.

Closing of a $46m Underwritten Public Offering

On April 13, 2020 the Company closed an underwritten direct offering for the purchase and sale of 59,800,000 units. Each unit is comprised of one common share and one common share purchase warrant at an offering price of $0.77 per unit. Gross proceeds from the offering were approximately $46,046 before deducting fees and other estimated offering expenses. The warrants have a five year-term and an exercise price of $0.96 per share. Canaccord Genuity Corp. and Canaccord Genuity LLC acted as the lead underwriters for the offering, together with a syndicate of underwriters.

Truss CBD USA Joint Business Venture

On April 15, 2020, the Company announced the formation of its Truss CBD USA joint business venture with Molson Coors to explore opportunities for non-alcohol hemp-derived CBD beverages in the State of Colorado. Established in Colorado, Truss CBD USA will be majority owned by Molson Coors and will operate as a stand-alone entity with its own board of directors, management team, resources and go-to-market strategy. All production and distribution for Truss CBD USA will be kept within Colorado state lines since it is one of a few states that has an established regulatory framework for hemp-derived CBD in food and beverages. Truss CBD USA and HEXO’s activities in relation to it will be conducted in accordance with all applicable laws. The Company does not currently have and is not in the process of developing marijuana-related activities in the United States, even in U.S. states where such activity has been authorized within a state regulatory framework. As such, the Company is not and would not be considered in the future a “U.S. Marijuana Issuer” within the meaning set forth in CSA Staff Notice 51-352 (Revised) - Issuers with U.S. Marijuana-Related Activities.

18        MD&A

Early Conversion Options for Debentures

On May 18, 2020 the Company agreed with certain holders of the Company’s 8% unsecured convertible debentures maturing December 5, 2022 (the “Debentures”) who accepted an opportunity offered by the Company to voluntarily convert all or a portion of their Debentures for Conversion Units (as defined below) in respect of a total of $29,860 aggregate principal amount of Debentures (the “Early Conversion Option”).

The Company offered the Early Conversion Option to all holders of the $70,000 outstanding aggregate principal amount of the Debentures (the “Debenture holders”), subject to acceptance by Debenture holders (each an “Electing Debenture holder”) holding a minimum of $20 million aggregate principal amount of the Debentures by May 17, 2020. The Early Conversion Option was limited to $30,000 aggregate principal amount of the Debentures being converted, with Electing Debenture holders for more than this maximum amount being limited to converting their pro rata portion of the $30,000 aggregate principal amount of Debentures to be converted.

Upon completion of the Early Conversion Option, Electing Debenture holders will receive for the principal amount of their Debentures to be converted, units of the Company (the “Conversion Units”) issued at a price of $0.80 per Conversion Unit, instead of common shares otherwise issuable on conversion of the Debentures at the existing conversion price of $3.16 per share or, at the option of the Debenture holders, at the market price at the time of maturity, in each case as currently provided for under the Debentures. Each Conversion Unit will consist of one common share (a “Conversion Share”) and one-half of one common share purchase warrant of the Company (each whole warrant, a “Conversion Warrant”). Each Conversion Warrant will be exercisable by the holder to purchase one common share (a “Conversion Warrant Share”) at an exercise price of $1.00 per share for a period of three years from issuance. The Conversion Shares will be subject to restrictions against resale for a period of one year from issuance as part of the terms of the Early Conversion Option. In addition, the Conversion Warrants and Conversion Warrant Shares will be subject to resale restrictions ending 4 months and one day from issuance of the Conversion Warrants under applicable securities laws. It is expected that the Early Conversion Option will be completed in June 2020.

Closing of a $57.5m Underwritten Public Offering

On May 21, 2020 the Company closed an underwritten public offering for the purchase and sale of 55,600,000 units and 8,340,000 over-allotment units. Each unit is comprised of one common share and one-half common share purchase warrant at an offering price of $0.90 per unit. Gross proceeds from the offering were approximately $57,546 before deducting fees and other estimated offering expenses. The warrants have a five year-term and an exercise price of $1.05 per share. Canaccord Genuity Corp. and Canaccord Genuity LLC acted as the lead underwriters for the offering, together with a syndicate of underwriters.

19        MD&A

Non-IFRS Measures

We have included certain non-IFRS performance measures in this MD&A, as defined in this section. We employ these measures internally to measure our operating and financial performance. We believe that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate our operating results, underlying performance and future prospects in a manner similar to management.

As there are no standardized methods of calculating these non-IFRS measures, our methods may differ from those used by others, and accordingly, these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

SHIPPED REVENUE

Shipped revenue represents the sales figure derived from the gross sale of adult-use, medical and whole sale cannabis under the normal course of business prior to the adjustments for sales return provisions, price concessions and excise taxes. The measure provides management and readers of this MD&A visibility over the Company’s pre-adjusted true gross sales figures and the ability to observe the impact of provisions for sales returns, price concessions and excise taxes to arrive at net revenue.

ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (“Adjusted EBITDA”)

The Company has identified Adjusted EBITDA as a relevant industry performance indicator. Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates Adjusted EBITDA as Total net loss, plus (minus) income taxes (recovery), plus (minus) finance expense (income) net, plus depreciation, plus amortization, plus (minus) investment (gains) losses, plus (minus) non-cash fair value adjustments, plus (minus) non-recurring expenses, plus (minus) other non-cash items. See Adjusted EBITDA table for those items comprising investment (gains)/losses, non-cash fair value adjustments, non-recurring expenses and other non-cash items. Management believes this measure provides useful information as it is a commonly used measure in the capital markets to approximate operating earnings.

Key Operating Performance Indicators

We have included certain key operating performance indicators within this MD&A, as defined in this section. We utilize these metrics internally for a range of purposes such as critical inputs in fair valuation techniques to evaluating the operating performance results in a given period.

EXPECTED PLANT YIELD

The expected plant yield is utilized in the valuation of biological assets on hand as at the period end. This represents an unobservable input to a level 3 fair value estimate and is derived from the Company’s historical harvests as well as the expertise of the appropriate personnel. A sensitivity analysis over this input was performed and included in the ‘Biological Assets – Fair Value Measurement’ section below.

PRODUCTION CAPACITY

The production capacity disclosed throughout this MD&A represents management’s best estimate and is derived from the historical actual output of production as well as the use of cultivation expertise existing within the Company.

KILOGRAMS PRODUCED

The kilograms harvested during the period representing the amount of dried gram and dried gram equivalents harvested and produced from biological assets but not necessarily sold during the period.

Other Defined Additional IFRS Measure

We have included the below additional IFRS measure as this represents a cannabis industry financial statement line item and is present within the Company’s statement of loss and comprehensive loss for the three and nine months ended April 30, 2020.

GROSS MARGIN BEFORE FAIR VALUE ADJUSTMENTS

We utilize this measure to provide a representation of performance in the period by excluding the fair value measurements as required by IFRS, realized fair value amounts on inventory sold, unrealized gain on changes in fair value of biological assets, write-off of biological assets and destruction costs and write down of inventory to net realizable value. We believe this measure provides useful information as it represents the gross margin for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as cost of goods sold. In accordance with CSA Staff Notice 51-357 issued in October 2018, we utilize an adjusted gross margin to provide a representation of performance in the period by excluding non-cash fair value measurements as required by IFRS. We believe this measure provides useful information as it represents the gross margin for management purposes based on cost to produce, package and ship inventory sold, exclusive of any fair value measurements as required by IFRS. The metric is calculated by removing all amounts related to biological asset fair value accounting under IFRS, including gains on transformation of biological assets and the cost of finished harvest inventory sold as well as fair value adjustments to net realizable value, which represents the fair value measured portion of inventory cost (“fair value cost adjustment”) recognized as cost of goods sold.

20        MD&A

Operational and Financial Highlights

KEY FINANCIAL PERFORMANCE INDICATORS

Summary of results for the three and nine months ended April 30, 2020 and 2019:

	For the three months ended									For the nine months ended
Income Statement Snapshot	April 30, 2020			January 31, 2020			April 30, 2019			April 30, 2020			April 30, 2019
	$			$			$			$			$
Revenue from sale of goods		30,895			23,817			15,930			74,009			38,739
Excise taxes		(8,817	)		(6,861	)		(2,974	)		(20,516	)		(6,792	)
Net revenue from sale of goods		22,078			16,956			12,956			53,493			31,947
Ancillary revenue		54			51			61			145			170
Gross margin before fair value adjustments		8,783			5,676			6,440			18,873			16,212
Gross margin		5,730			(7,912	)		21,832			(23,260	)		40,674
Operating expenses		(26,786	)		(281,506	)		(24,056	)		(347,883	)		(64,580	)
Loss from operations		(21,056	)		(289,418	)		(2,224	)		(371,143	)		(23,906	)
Other income/(expenses and losses)		1,537			(8,749	)		(5,527	)		(12,790	)		(979	)
Net loss before tax		(19,519	)		(298,167	)		(7,751	)		(383,933	)		(24,885	)
Tax recovery		—			—			—			6,023			—
Total Net loss		(19,519	)		(298,167	)		(7,751	)		(377,910	)		(24,885	)

Operational Results

For the three months ended	Units		April 30, 2020		January 31, 2020		October 31, 2019		July 31, 2019		April 30, 2019
Avg. gross selling price of adult-use dried gram & gram equivalents		$		3.19		3.49		4.35		4.74		5.29
Kilograms sold of adult-use dried gram & gram equivalents		kg		9,338		6,579		4,196		4,009		2,759
Avg. gross selling price of medical dried gram & gram equivalents		$		7.44		7.87		8.12		8.34		9.12
Kilograms sold of medical dried gram & gram equivalents		kg		104		107		129		137		145
Avg. gross selling price of wholesale dried gram & gram equivalents		$		2.18		—		—		0.56		—
Kilograms sold of wholesale dried gram & gram equivalents		kg		156		—		—		672		—
Total kilograms produced of dried gram equivalents		kg		19,130		22,305		16,107		16,824		9,804

Q3 PERIOD HIGHLIGHTS

• Total revenue from sales in the quarter increased by $7,078 or 30% to $30,895 from $23,817 in the second quarter of fiscal 2020.

• Total revenue from sales in the quarter increased by $14,965 or 94% from $15,930 compared to the third quarter of fiscal 2019.

• A 7% increase of gross margin to 40% quarter over quarter.

• Adjusted EBITDA continued trending toward positive by decreasing to ($4,257) sequentially from ($8,464) in the previous quarter.

• The Company raised net proceeds of $43,290 through an underwritten public offering during the period.

• As at April 30, 2020, the Company held working capital of $215,661.

• Certain Niagara facility-based equipment was disposed of, for a loss of $2,883.

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Summary of Results

Revenue    

	Q3’20			Q2’20			Q1’20			Q4’ 19			Q3 ’19
ADULT-USE
Adult-use cannabis gross revenue	$	29,781		$	22,983		$	18,250		$	18,997		$	14,607
Adult-use excise taxes		(8,736	)		(6,722	)		(4,666	)		(4,937	)		(2,741	)
Adult-use cannabis net revenue		21,045			16,261			13,584			14,060			11,866
Dried grams and gram equivalents sold (kg)		9,338			6,579			4,196			4,009			2,759
Adult-use gross revenue/gram equivalent	$	3.19		$	3.49		$	4.35		$	4.74		$	5.29
Adult-use net revenue/gram equivalent	$	2.25		$	2.47		$	3.24		$	3.51		$	4.30
MEDICAL
Medical cannabis gross revenue	$	774		$	834		$	1,047		$	1,142		$	1,323
Medical cannabis excise taxes		(81	)		(139	)		(173	)		(185	)		(233	)
Medical cannabis net revenue		693			695			874			957			1,090
Dried grams and gram equivalents sold (kg)		104			107			129			137			145
Medical gross revenue/gram equivalent	$	7.44		$	7.87		$	8.12		$	8.34		$	9.12
Medical net revenue/gram equivalent	$	6.66		$	6.50		$	6.78		$	6.99		$	7.52
WHOLESALE
Wholesale cannabis gross revenue	$	340		$	—		$	—		$	378		$	—
Wholesale cannabis excise taxes		—			—			—			—			—
Wholesale cannabis net revenue		340			—			—			378			—
Dried grams and gram equivalents sold (kg)		156			—			—			672			—
Wholesale gross revenue/gram equivalent	$	2.18		$	—		$	—		$	0.56		$	—
Wholesale net revenue/gram equivalent	$	2.18		$	—		$	—		$	0.56		$	—
ANCILLARY REVENUE1	$	54		$	51		$	41		$	29		$	61
Total net revenue	$	22,132		$	17,007		$	14,499		$	15,424		$	13,017

¹ Revenue outside of the primary operations of the Company.

Total net revenue in the third quarter of fiscal 2020 increased 30% sequentially to $22,132 from $17,007 and from $13,017 in the same period of fiscal 2019 for those reasons outlined below. Beginning in the fourth quarter of fiscal 2019, adult-use revenues began to be impacted by sales returns and price concessions due to evolving market conditions. These conditions and therefore returns and concessions were not yet present in the comparative period third quarter of fiscal 2019.

Non-cannabis ancillary sales remained relatively flat at $54 when compared to $51 in the second quarter of fiscal 2020, and $61 in the comparative period of fiscal 2019. These revenues are derived from a management agreement held by the Company with arms-length partners.

OUTLOOK

The Company expects to be Adjusted EBITDA positive in the first half of fiscal 2021, subject to certain assumptions (outlined below) regarding store count, operational improvements, cost saving initiatives and the economic impact of COVID-19.

Assumptions built into the forecasted Adjusted EBITDA are partially based on the following: forecasted store rollouts based on conversations with provincial cannabis agencies; THC improvement from cultivation which are expected to lead to improved sales of favourably priced products; new product rollouts of Vapes, Extracts, Edibles and Pre-rolls between March and May of 2020; Growth in sales to provinces outside Quebec; Changes to captive D&O Insurance resulting in cost savings; Trim utilization initiatives and operating expense driven by restructuring, reduced travel and consultants.

These assumptions are exclusive of the effects of COVID-19, which could be material.

ADULT-USE SALES

During the three months ended April 30, 2020, the Company recorded gross adult-use sales from cannabis of $29,781, an increase of 30% or $6,798 from previous quarter sales of $22,983. As stated in section ‘COVID-19 Update’ Canadian cannabis sales during the Company’s third quarter saw varying degrees of growth. Gross adult-use sales also increased in comparison to the prior year’s comparative quarter by 104% or $15,174 from $14,607.

The Company realized increased sales in the previous quarter due to the launch of Original Stash, a bulk 28g product, in Ontario, British Columbia and Alberta and a significant increase in sales in Quebec after the initial launch in the first quarter fiscal 2020. Original Stash was launched in Saskatchewan during the current period and continued to drive an increase in adult-use sales across the board with a 48% increase from the second quarter of fiscal 2020. The increased sales of Original Stash also contribute to the reduced price

22        MD&A

to per gram before excise taxes which fell moderately by 9% to $3.19 from $3.49 during the period. Also adding to the decrease were the provisions for returns and price concessions which increased 35% quarter over quarter. Original Stash is priced below our HEXO and premium UP brand offerings. Newly launched hash in the quarter comprised approximately 19% of the overall sales growth quarter over quarter, similarly, oil extract drops contributed 7% to overall adult-use sales growth.

During the fiscal quarter the Company realized gross sales of $23,885 to the SQDC, an increase of $4,055 sequentially from the prior quarter, however, sales to the SQDC as a percentage of overall gross adult-use revenues was reduced by 6% to 80%. This increase to sales was primarily due to an increase in dry flower sales to SDQC by approximately 25%. During the period the Company’s sales to the OCS and BCLDB were $1,552 and $3,136 which fluctuated from $1,631 and $490 respectively. These increases were impacted by adjustments to provisions and returns, as the respective sales volumes of OCS remains static quarter over quarter, while BCLDB revenues and volumes sold increased three-fold sequentially. Total ALGC sales declined to $48 from $815 quarter over quarter due to the increased returns provision in the quarter due to slower sell through on the recently price-reduced dried flower sales.

Sales in the current quarter as compared to the comparative period of fiscal 2019 increased due to the above stated influencing factors as well as the following;

• The Company has grown its house of brands since the third quarter of fiscal 2019 by adding the value brand Original Stash and premium line UP;

• In the current period, the Company is present in all ten provinces of Canada, as opposed to just four in the comparative period; and

• Contrarily, there existed no market conditions indicating a requirement for price concessions or sales return allowances in the third quarter of fiscal 2019, as the legalized Canadian cannabis market was still emerging, and therefore there were no reductions to revenue.

Adult-use volume sold in the period increased 42% to 9,338 kg compared to 6,573 kg in the prior period. Original Stash contributed an additional 1,524 kg in the period, as sales continue to grow. New products such as hash and oil extracts contributed an additional 718 kg in the quarter from the prior period. The remaining balance of the increase is the result of the increase in sales as outlined above.

Sales volume in the third quarter of fiscal 2020 increased 238% from 2,759 kg equivalents sold in the same quarter of fiscal 2019. The Company has diversified its geographical market penetration when compared to the same period of the previous fiscal year, with the addition of six more provinces, the Company’s house of brands has also expanded to include the premium UP brand and the mass market Original Stash.

Dried flower sold during the period continue to dominate sales volumes generated by the Company, contributing approximately 92% of the total sales in the period, a decrease from 98% from the prior period due to new hash and extract product sales in the period. Dry flower comprised 90% to adult-use sales in the comparative period of fiscal 2019.

	Q3’20			Q2’20			Q1’20			Q4’ 19			Q3 ’19
Shipped Revenue	$	31,731		$	24,425		$	20,228		$	22,808		$	14,607
Less: price concessions		(1,083	)		(249	)		(1,244	)		(2,847	)		—
Less: provision for sales returns		(867	)		(1,193	)		(734	)		(964	)		—
Revenue from sale of adult-use cannabis		29,781			22,983			18,250			18,997			14,607
Excise taxes		(8,736	)		(6,722	)		(4,666	)		(4,937	)		(2,741	)
Net revenue from sale of adult-use cannabis	$	21,045		$	16,261		$	13,584		$	14,060		$	11,866

During the three months ended April 30, 2020, the adult-use shipped revenue increased 30% from the previous quarter to $31,731 and 117% from the comparative period of fiscal 2019. The Company underwent price concessions beginning in the fourth quarter of fiscal 2019 due to the newly present market conditions such as competition, consumer preferences and product demand. These concessions had tapered during the previous quarter to $249 as market prices continued to settle. In the current period, these concessions increased to $1,083, as certain dry flower and oil product price reductions during the first and second quarter of fiscal 2020 have been realized. The increase was due to the reduction of certain premium Up brand dry flower products. The estimate based on the Company’s historical data of other products and internal expertise. The Company also began to provide for sales returns beginning at the end of fiscal year 2019. The provision is reflective of a general best estimate provision for returns on the Company’s assessment of sell-through and slow-moving inventory amongst its clients. The prevision has returned to its approximate average of the return provisions as seen in quarter four of fiscal 2019 and the first quarter of this fiscal year. The increased return provision in the previous quarter was due to slower than anticipated ALGC based dried flower sales which were impacted by reduced prices in previous quarters.

MEDICAL SALES

Gross medical revenue in the three months ended April 30, 2020 decreased moderately by 7% to $774 compared to $834 in the previous quarter of fiscal 2020. Sales volumes remained consistent from the previously quarter decreasing by only 2 kg to 104 kg. Thus, the reduction in sales revenues were indicative of lower revenue per gram sold, specifically the oil product offerings. During the period, prices were reduced on certain medical oil offerings in order to help align with corresponding retail prices. The average oil offering price per gram equivalent sold in the period was reduced by $2.06. The average sales generated on the sale of a gram of dried

23        MD&A

product remained relatively unchanged. Therefore, the reduced oil pricing on medical products resulted in the decrease in medical sales and average gross and net revenue per gram.

Gross medical revenue in the three months ended April 30, 2020 decreased by 41% from $1,323 in the comparative period of fiscal year 2019. This decrease is derived from two factors; the first is a reduction in medical product pricing, in part, due to the legalization of cannabis in Canada and secondly the Company’s shift towards focusing its resources on the adult-use market. For this reason, the average gross revenue per gram and gram equivalent has decreased by 18% (or $1.67) since the third quarter of fiscal 2019.

WHOLESALE SALES

These sales pertain to transactions held between the Company and other licensed producers. The characteristics of such sales are generally large quantities at reduced prices per gram and gram equivalent. These sales are also free of excise taxes as this burden belongs to the acquirer and ultimately the seller of the cannabis products.

During the three months ended April 30, 2020, the Company resumed engaging in wholesale activity, resulting in a contribution of $340 to gross and net revenues. There was no wholesaling activity in the first two fiscal quarters of fiscal 2020. The increase of revenue per gram sold to $2.18 from $0.56 in the fourth quarter of fiscal 2019 (the last period in which we realized wholesale revenues) is due to the current periods wholesaling of cannabis distillate, which commands a higher value in the market versus dry flower. Currently, the Company’s primary focus remains on the adult-use retail market, however, additional wholesaling opportunities continue to be assessed and evaluated as they arise and may or may not continue to be realized in future periods.

Cost of Sales, Excise Taxes and Fair Value Adjustments

Cost of goods sold includes the direct and indirect costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging, shipping costs, depreciation and applicable stock-based compensation and direct and indirect overhead.

Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to cost of sales.

Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost to complete and selling costs and includes certain management estimates.

	For the three months ended									For the nine months ended
	April 30, 2020			January 31, 2020			April 30, 2019			April 30, 2020			April 30, 2019
	$			$			$			$			$
Excise taxes		8,817			6,861			2,974			20,516			6,792
Cost of sales		13,349			11,331			6,577			34,765			15,905
Realized fair value amounts on inventory sold		9,251			5,447			4,665			21,362			9,072
Unrealized gain on changes in fair value of biological assets		(6,379	)		(7,948	)		(20,057	)		(21,378	)		(33,534	)
Write off of biological assets and destruction costs		—			—			—			663			—
Write off of inventory		—			—			—			2,175			—
Write down of inventory to net realizable value		181			16,089			—			39,311			—

EXCISE TAXES

Excise taxes began to be incurred upon legalization on October 17, 2018 and are applicable to the adult-use revenues and medical sales achieved thereafter. Excise taxes are presented against the revenue generated by the sale of cannabis to derive the Company’s net revenues on cannabis sales. Excise taxes are a function of fixed provincial and territorial rates based upon the gram equivalents sold as well as a variable ad valorem component which is dependent upon the selling price of the products.

The current periods excise taxes increased by 29% to $8,817 when compared to $6,861 in the previous quarter. The increase in excise taxes over the quarter is in line and on trend with the increase in sales during the same period. Excise tax as a percentage of gross sales (net of price concession and sales returns) remains static compared to the previous quarter and continues to be approximately 27%-29% in third quarter of fiscal 2020.

Excise taxes increased significantly when compared to the third quarter of fiscal 2019, which is the result of with the increased sales in the period. However, as a percentage of revenues, excise taxes have grown to 29% as compared to around 18% in the comparative period. This is due to the popularity of the Company’s Original Stash brand which possess a relatively low sales price per gram and thus inflates the excise tax expenses per sales dollar earned.

During the nine months ended April 30, 2020 total excise taxes increased significantly as compared to the prior fiscal years comparable period. The increase is due to those reasons as outlined above as well as the existence of a stub period of excise taxes in the comparative nine months ended April 30, 2019. The stub period consisted of just two weeks of excise tax applicable sales activity towards the end of the first quarter of fiscal year 2019, thus causing the greater increase compared to the current period.

24        MD&A

COST OF SALES

Cost of sales for the quarter ended April 30, 2020 were $13,349, compared to $11,331 in the previous quarter, and $2,974 in the comparative quarter in fiscal 2019. The 18% increase in cost of sales quarter over quarter is the result of increased sales in the period and were offset by the realized benefits of reduced direct and indirect labour. Two factors were involved in decreasing these labour costs. The first being, increased automation of packing activity at our facility in Belleville, ON which inherently has increased efficiencies and as well reduce traditional labour costs. Secondly, the Company continued to make rightsizing efforts during the period over its selected strains to cultivate, this was expedited by the impact of COVID-19 which allowed for reduced labour inputs to our cost per gram.

Cost of sales for the quarter ended April 30, 2020 increased 103% from $6,577 in the comparative of fiscal 2019. This increase in cost of sales quarter over quarter is on trend with the 94% increase in total sales during the same period and therefore is primarily the result of increased sales.

During the nine months ended April 30, 2020, total cost of sales increased is the result of increased sales volumes, part of which is due to the legalized adult-use market being only applicable to the stub period of October 17, 2018 to October 31, 2018 in the comparative period, and for those reasons as outlined above.

FAIR VALUE ADJUSTMENTS, IMPAIRMENTS AND WRITE OFFS

The realized fair value adjustment on inventory sold for the quarter ended April 30, 2020 increased to $9,251 compared to the previous quarters $5,447. This variance is primarily due to increased sales volumes of inventory sold when compared to the prior quarter. Also during the current period was the realization of reduced cultivation costs which began the previous quarter.

The realized fair value adjustment on inventory sold for the quarter ended April 30, 2020 increased 98% compared to $4,665 for the same period of fiscal 2019. This variance is due to the factors as outlined above as well as, and is offset on a net basis by a decrease in the inherent fair value per gram and gram equivalent sold when compared to the third quarter of fiscal 2019, due to pricing adjustments reflective of market conditions existing in fiscal 2020.

The unrealized gain on changes in fair value of biological assets for the current quarter was ($6,379) compared to ($7,948) for the prior quarter. The decrease is due to a reduction in the total number of plants on hand, which were 187,614 as compared to 270,683. The reduction is due to the Company’s rightsizing efforts to align is product strains in cultivation to its sales and market demand.

The unrealized gain on changes in fair value of biological assets decreased 68% from ($20,057) in the same quarter of fiscal 2019. The variance can be attributed primarily to the significantly reduced fair value of these plants based upon the decreased selling price fair value input. The lower fair value is a function of reduced average market prices due to the conditions present in fiscal 2020.

The change in fair value adjustments on the sale of inventory and biological assets for the nine months ended April 30, 2020 as compared to the comparative period of fiscal 2019 were based upon the factors as noted above.

During the first quarter of fiscal 2020, the Company incurred a write off on its biological assets and inventory of $663 and $2,175, respectively due to the halted production at the Niagara facility as discussed in section – Corporate Restructuring. This amount is comprised of $438 of biological asset impairment, $225 incurred associated with destruction costs of biological assets and $2,175 incurred for the destruction of inventory. No such write offs occurred during the three months ended April 30, 2020.

The Company incurred net write downs on inventory to net realizable value of $181 during the three months ended April 30, 2020. These losses were due to the following;

• Write down of concentrated bulk purchase of $1,422 due, in part, to an oversupply in the adult-use market, of which lowered the value when compared to the contractually obligated price; and

• A reversal of impairment was recognized on previously written down cannabis trim of $1,241 due to the Company’s trim utilization plan in which cannabis trim which was previously mostly used for extraction, is now being utilized in other cannabis and value - added products.

The Company incurred write downs on inventory to net realizable value of $16,089 during the three months ended January 31, 2020. These losses were due to the following;

• Write down of surplus cannabis trim (trim was primarily used for extraction purposes) and milled products the amount of $3,082 due to an excess of stock relative to the Company’s short-term demand for cannabis distillate production;

• Write down of bulk flower purchase of $11,766 due, in part to an oversupply in the bulk product market, of which lowered the value when compared to the contracted price. The purchase of bulk product was supplied through the acquired supply agreement acquired through the Company’s acquisition of Newstrike Brands Ltd. This supply agreement is currently the subject of litigation and is alleged by the Company to be void as it was negotiated in bad faith at prices well in excess of market; and

• Write down in the amount of $1,241 was recognized due to costs related to packaging reconfiguration.

The Company write downs on inventory to net realizable value of $23,041 during the three months ended October 31, 2019. The impairment losses were realized on the Company’s inventory and were comprised of the following;

25        MD&A

• Write down of a surplus of cannabis trim (trim was primarily used for extraction purposes) and milled products the amount of $14,016 due to an excess of stock relative to the Company’s short-term demand for cannabis distillate production;

• Write down of bulk purchased product of $4,400 due, in part, to an oversupply in the market of bulk products with lower potencies as well as a relatively low value when compared to competing bulk goods with a higher potency in the current adult-use market;

• Write down of oil based finished goods of $3,436 due a surplus of finished goods as oil-based products haven’t captured the market share as originally estimated. Also contributing to the impairment is the decision made by certain provinces to return oil products with packaged dates greater than 3 to 4 months old and

• Write down of finished goods of $1,186 which are required to be archived as at October 31, 2019 and possess a net realizable value of $nil.

These write downs of inventory are primarily the result the Company’s economic risk assumed in the Canadian cannabis industry. Most notably, the recent economic climate changed in which, market prices and demands have been revised and adjusted to reflect current information and actual results obtained during the first year of recreational legalization in Canada. These changes included reduced average selling prices per gram and gram equivalents, as well as modified market demands for certain cannabis products ranging from specific active ingredient contents to method of consumption. The continuing evolution of these market conditions represent ongoing uncertainties that may affect the Company’s future financial results. See “Risk Factors” for additional economic and inventory risks.

Operating Expenses

			For the three months ended				For the nine months ended
	April 30, 2020		January 31, 2020		April 30, 2019		April 30, 2020		April 30, 2019
	$		$		$		$		$
General and administration		11,238		14,446		10,495		40,833		23,572
Marketing and promotion		2,131		377		5,122		9,621		21,671
Share-based compensation		6,171		7,903		8,162		22,237		17,811
Research and development		1,017		1,201		—		3,962		—
Amortization of intangible assets		341		1,683		137		3,690		360
Depreciation of property, plant and equipment		1,566		1,992		140		4,890		1,166
Restructuring costs		865		259		—		4,846		—
Impairment of property, plant and equipment		220		32,082		—		33,004		—
Impairment of intangible assets		—		106,189		—		106,189		—
Impairment of goodwill		—		111,877		—		111,877		—
Realization of onerous contract		—		3,000		—		3,000		—
Disposal of long lived assets		3,237		497		—		3,734		—
Total		26,786		281,506		24,056		347,883		64,580

Operating expenses include general and administrative expenses, marketing and promotion, share-based compensation, research and development, and depreciation/amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, and general corporate communications expenses. General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees.

GENERAL AND ADMINISTRATIVE

During the three months ended April 30, 2020, the Company’s general and administrative expenses decreased to $11,238 from $14,446, quarter over quarter. The Company continues looking to towards achieving positive adjusted EBITDA and making efforts towards reducing its operating expenses. Quarter over quarter, insurance costs were reduced by $550, total legal and professional fees were reduced by $1,053, total IT/telecom costs decreased by $261 and a reduction to travel related costs of $437 was realized, approximately half of which was due to COVID-19 related reduced travel.

General and administrative expenses increased moderately by 7% from $10,495 in the three months ended April 30, 2020, compared to the comparative period of previous fiscal year. This change is indicative of increased growth to total operations when compared to the third quarter of fiscal 2019, however, due to the Company’s concerted effort to reduce operating expenses through its rightsizing activities. Primary drivers of this net change include; increase of salaries and benefits of $1,017, offset by reductions to consulting and travel costs of $367 and $344, respectively.

Total general and administrative expenses for the nine months ended April 30, 2020 increased to $40,833 from $23,572 as compared to the same period of fiscal 2019. This increase reflects the general increase to the scale of our operations, including an increase in management, general, finance and administrative staff which lead to an increase of $3,658 to wages and payroll related expenses. Professional services such as legal fees, audit fees and other accounting advisory services increased by $3,407 as Company has increased in both complexity and size. When compared to the third quarter of fiscal 2019, an increase of $5,246 was realized for additional commercial insurance costs and directors and officer’s insurance due to the Company’s NYSE listing. Finally, IT/telecom related expenses have grown by $1,245 as the Company’s leased commercial administrative space and headcount has increased.

26        MD&A

MARKETING AND PROMOTION

During the three and nine months ended April 30, 2020 total market and promotion expenses decreased to $2,131 and $9,621 from $5,122 and $21,671, respectively. The decrease to these expenses during fiscal 2020 is due to the timing of legalization to the Canadian cannabis adult-use market. During the fiscal year to date period ended April 30, 2019 the Company underwent major marketing and promotional campaigns in order to establish its market presence and build its brand of HEXO through several marketing venues. In subsequent periods, these efforts were scaled back and rightsized in order to more closely align with the Company’s current needs. Marketing and promotional expenses in the current period are reflective of the appropriate staff and travel-related expenses, printing and promotional materials and campaigns as well as advertisement costs. The cost reductions attributable to the reduction promotional and advertising activities in the three and nine months ended April 30, 2020 amounted to $2,311 and $11,003, respectively.

Quarter over quarter marketing and promotion expenses increased from $377. The increase is due to the Company’s rightsizing and cost reduction activity in the previous quarter, in which, the Company renegotiated certain of its marketing engagements which resulted in $852 in cost recoveries.

RESEARCH AND DEVELOPMENT (“R&D”)

The Company incurred R&D related expensed of $1,017 during the three months ended April 30, 2020. Quarter over quarter R&D expenses were reduced by $184 from $1,201. The decrease is reflective of a rightsizing to the R&D and innovation departments headcount and the resultant lower payroll related expenses. The comparative period of fiscal 2019 is nil, as the Company began realizing significant R&D expenses during the fourth quarter of fiscal 2019.

SHARE-BASED COMPENSATION

Share-based compensation decreased to $6,171 as compared to $8,162 for the same period in fiscal 2019. Due to the vesting structuring of stock option grants issued in fiscal 2019, the realization of share-based expense is weighted more significantly in the first subsequent twelve months after issuance. Thus, critical vesting milestones have been reached, along with subsequent grants in fiscal 2020 containing a lower call option value due to lower market prices, and therefore lower contribution of expenses over time.

Share-based compensation decreased by $1,732 from $7,903 quarter over quarter as a result of those reasons outlined above.

Total stock-based compensation for the nine months ended April 30, 2020 increased to $22,237 from $17,811 as compared to the same period of fiscal 2019 due to the first two fiscal quarters of fiscal 2020 incurring the more heavily weighted expenses during the first year of vesting after the grants issued in the third quarter of fiscal 2019.

DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT

The depreciation of property, plant and equipment decreased in the period to $1,566 from $1,992 in the third quarter of fiscal 2020 as compared to previous quarter. This decrease is the result of the lower book value base upon which depreciation is taken due the $31,606 of impairment to certain Niagara based property, plant and equipment, realized in previous fiscal quarter.

The depreciation of property, plant and equipment has increased to $1,566 in the quarter, compared with $140 for the same period in fiscal 2019. New the fiscal year was the adoption of IFRS 16 – Leases, which took place August 1, 2019 in which certain material capital leases are capitalized as right-of-use assets to property, plant and equipment. Resultant to this, depreciation of the Company’s right-of-use assets contributed $752 in the period, where none such depreciation existed in the comparative period of fiscal 2019. The increase is due to the general increased scale of operations of the Company and long lives assets acquired through business acquisition which took place on May 24, 2019. The resultant additions to office furniture, vehicles and other equipment in which the associated depreciation is not capitalized to inventory increased the total depreciation when compared to the prior fiscal years third quarter.

Total depreciation of property, plant and equipment for the nine months ended April 30, 2020 increased to $4,890 from $1,166 as compared to the same period of fiscal 2019 for those reasons as outlined above.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets decreased significantly in the period to $341 from $1,683 in the second quarter of fiscal 2020. This decrease is the result of the lower book value base upon which amortization is taken due the impairment of intangible assets realized in previous fiscal quarter.

Amortization of intangible assets has increased by $204 in the quarter, compared to $137 for the same period in fiscal 2019. The cause of this increase is the result of the additional amortization incurred over the fair market value of the identified $113,888 cultivation and license intangible assets obtained on May 24, 2019 through a business acquisition, subsequently impaired (in the second quarter of fiscal 2020) to a value $7,699. Additionally, capitalized patents have increased by $1,112 since the comparative period.

Total amortization of intangible assets for the nine months ended April 30, 2020 increased to $3,690 from $360 as compared to the nine months ended April 30, 2019, for those reasons as outlined above.

RESTRUCTURING COSTS

During the three and nine months ended April 30, 2020, the Company incurred restructuring costs associated to the rightsizing of operations. These expenses are the result of the restructuring efforts as discussed in the section – Corporate Restructuring. These

27        MD&A

costs amounted to $865 and $4,596, respectively and were primarily comprised of severance and other payroll related termination costs. There were no restructuring costs incurred during fiscal year 2019.

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT & LOSS ON DISPOSAL

Operations at the Niagara facility had previously been halted as a result of the Company’s restructuring plans, see – Corporate Restructuring’. On March 2, 2020, the Company completed a strategic review of its cultivation capacity and made the decision to market the Niagara facility for sale. As a result, the carrying amount of the Niagara facility has been classified as held for sale and is expected to be recovered principally through its sale rather than through continuing use. During the three months ended April 30, 2020, certain of the Niagara equipment was disposed of driving the resultant loss of $3,237.

Further impairment of $220 were incurred in the period on the basis of adjusting the Niagara facility and land held for sale to its sales price (fair market value less disposal costs).

The recoverable amount was determined by reference to fair value less costs of disposal using a market approach. The market approach was based on comparable transactions for similar assets, which is categorized within Level 2 of the fair value hierarchy. As a result, an impairment loss of $31,606 was recorded in property, plant and equipment during the three months ended January 31, 2020. There was no impairment of property, plant and equipment in the current period or the comparative period. During the nine months ended April 30, 2020, the Company also realized impairment losses of $1,178 related to its right of use assets no longer utilized.

IMPAIRMENT OF INTANGIBLE ASSETS

During the three months ended January 31, 2020, in connection with the impairment loss of the Niagara facility’s property, plant and equipment the Company recorded an impairment loss of $106,189 relating to the cultivation and processing licenses associated with the Niagara facility. The licenses were acquired on the purchase of Newstrike Brands Ltd. and were recorded at fair market value.

There was no impairment of intangible assets in the current or comparative period.

IMPAIRMENT OF GOODWILL

During the previous quarter (the three months ended January 31, 2020), the Company recorded $111,877 of impairment to goodwill. Goodwill is monitored at the operating segment level, which is a company-wide level. As at January 31, 2020, the carrying amount of the Company’s total net assets significantly exceeded the Company’s market capitalization. In addition, slower than expected retail store roll outs in Canada and delays in government approval for cannabis derivative products resulted in a constrained distribution channels which have adversely affected overall market sales and profitability. As a result of these factors, management performed an indicator-based impairment test of Goodwill as at January 31, 2020.

The Company allocated all of its goodwill to the corporate level HEXO cost generating unit for impairment testing purposes, as this is the level at which management monitors goodwill. The recoverable amount was determined based on fair value less cost of disposal using a market-based approach based on the market capitalisation of the Company as at January 31, 2020. The assessment concluded that a full write down of goodwill was applicable.

There was no impairment of goodwill in the three months ended April 30, 2020 or during comparative period in fiscal 2019.

Other Income and Losses

	For the three months ended									For the nine months ended
	April 30,			January 31,			April 30,			April 30,			April 30,
	2020			2020			2019			2020			2019
	$			$			$			$			$
Revaluation of financial instruments gain/(loss)		4,955			2,714			(1,121	)		7,966			(4,273	)
Share of loss from investment in associates and joint ventures		(1,195	)		(1,591	)		(1,067	)		(4,468	)		(1,712	)
Unrealized (loss)/gain on convertible debenture receivable		(212	)		(413	)		(4,117	)		(3,253	)		1,862
Unrealized loss on investments		(311	)		(6,553	)		(277	)		(8,535	)		(277	)
Realized loss on investments		(1,217	)		(242	)		—			(1,444	)		—
Foreign exchange gain/(loss)		2,443			617			(39	)		3,017			(27	)
Interest and financing expenses		(3,279	)		(3,598	)		(148	)		(7,312	)		(164	)
Interest income		353			317			1,242			1,239			3,612
Total non-operating income/(loss)		1,537			(8,749	)		(5,527	)		(12,790	)		(979	)

Total other income and (losses) decreased to $1,537 in the three months ended April 30, 2020, from ($8,749) for the three months ended January 31, 2020 and from ($5,527) in the same period of fiscal 2019.

REVALUATION OF FINANCIAL INSTRUMENTS

During the period the Company’s gain on the revaluation of financial instruments increased to $4,955 from $2,714 in the comparative period. This is the result of a favorable reduction to the associated warrant liability upon the Black-Scholes revaluation as at the period end, primarily due to a decrease in the underlying market price from January 31, 2020.

28        MD&A

Alternatively, during the comparative period third quarter of fiscal 2019, a loss of ($1,121) occurred upon revaluation as the result of an increase to the underlying market price of the instrument. The underlying number of USD backed warrants has also increased to 13,473,056 (due to the private placements raised in the previous quarter) from 392,850 in the comparative period.

Total activity for the nine months ended April 30, 2020 increased to a gain position as compared to the nine months ended April 30, 2019, for those reasons as outlined above.

SHARE OF LOSS FROM INVESTMENT IN ASSOCIATES AND JOINT VENTURES

The line item represents the Company’s share of the operational results of our ventures and therefore are a function of the cumulative financial results for the period.

The total loss for the nine months ended April 30, 2020 increased to as compared to the nine months ended April 30, 2019, due to continued operational growth over the period, resulting in increased losses.

LOSSES ON CONVERTIBLE DEBENTURES

The loss on convertible debenture valuation remained relatively flat in the period from the previous quarter due to the conversion of the debentures to shares occurring early in the current quarter, resulting in minimized underlying share price volatility.

Alternatively, during the comparative period third quarter of fiscal 2019, the loss on revaluation as the result of the Company still possessing the total $10,000 of convertible debentures.

Total activity for the nine months ended April 30, 2020 amounted to a loss position as compared to the nine months ended April 30, 2019, due to the relative decrease of the underlying market price of the shares to which the instrument is revaluated too at each period end.

REALIZED AND UNREALIZED LOSSES ON INVESTMENTS

During the three months ended April 30, 2020, the company converted the remaining $7,000 convertible debentures and disposed of the common shares at a loss of $1,217. In the previous quarter, $3,000 convertible debentures were converted to common shares and sold at a loss, however the underlying market price decreased during the period resulting in higher loss per share disposal when compared to the prior period. These losses amounted to $1,468 in the nine months ended April 30, 2020.

No similar activity took place during the three and nine months ended April 30, 2019.

FOREIGN EXCHANGE GAIN/(LOSS)

The significant gain on foreign exchange realized in the three and nine months ended April 30, 2020 is due to the increase USD cash balance as generated from the two private placements in the second quarter of fiscal 2020 which generated gross proceeds of USD$45,000.

INTEREST AND FINANCING EXPENSES

These expenses are primarily comprised of accrued interest generated by the $70,000 convertible debentures issued in December 2019 and therefore were not present within the comparative period of fiscal 2019. These expenses remained relatively flat quarter over quarter.

INTEREST INCOME

These expenses are primarily comprised of accrued interest generated by the Company’s cash holdings, primarily the high interest savings accounts and GICs. The underlying cash balance remained relatively consistent quarter over quarter and therefore the generated income also remained flat.

As compared the three and nine months ended April 30, 2019 the Company’s cash balance has decreased from $173,092 to $94,325 thus, resulting in a reduction to generated interest income.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates Adjusted EBITDA as total net loss, plus (minus) income taxes (recovery), plus (minus) finance expense (income), plus depreciation, plus amortization, plus (minus) investment (gains) losses, plus (minus) non-cash fair value adjustments on the sale of in inventory and biological assets, plus (minus) restructuring costs as they are non-recurring expenses, plus (minus) certain non-cash items, as determined by management as follows:

	Q3’20			Q2’20			Q1’20			Q4’ 19			Q3 ’19
	$			$			$			$			$
Total net loss		(19,519	)		(298,167	)		(60,016	)		(44,729	)		(7,751	)
Income taxes (recovery)		—			—			(6,023	)		(18,213	)		—

29        MD&A

	Q3’20			Q2’20			Q1’20			Q4’ 19			Q3 ’19
	$			$			$			$			$
Finance expense (income), net		2,926			3,281			(136	)		(1,270	)		(1,094	)
Depreciation, included in cost of sales		950			920			433			446			293
Depreciation, included in operating expenses		1,566			1,992			1,333			582			140
Amortization, included in operating expenses		341			1,683			1,666			1,406			137
Investment (gains) losses
Revaluation of financial instruments loss/(gain)		(4,955	)		(2,714	)		(297	)		(543	)		1,121
Share of loss from investment in joint venture		1,195			1,591			1,682			1,253			1,067
Unrealized loss/(gain) on convertible debentures		212			413			2,627			125			4,117
Unrealized loss on investments		311			6,553			1,671			38			277
Realized loss/(gain) on investments		1,217			242			(17	)		215			—
Foreign exchange loss/(gain)		(2,443	)		(617	)		46			51			39
Non-cash fair value adjustments
Realized fair value amounts on inventory sold		9,251			5,447			6,663			7,285			4,665
Unrealized gain on changes in fair value of biological assets		(6,379	)		(7,948	)		(7,051	)		(5,322	)		(20,057	)
Non-recurring expenses
Restructuring costs		865			259			3,722			—			—
Other non-cash items
Share-based compensation, included in operating expenses		6,171			7,903			8,164			10,197			8,162
Share-based compensation, included in cost of sales		396			964			238			936			403
Write-off biological assets and destruction costs		—			—			663			—			—
Write-off of inventory		—			—			2,175			—			—
Write down of inventory to net realizable value		181			16,089			23,041			19,335			—
Impairment loss on right-use-assets		—			476			702			—			—
Impairment loss on property, plant and equipment		220			31,606			—			—			—
Impairment of intangible assets		—			106,189			—			—			—
Impairment of goodwill		—			111,877			—			—			—
Recognition of onerous contract		—			3,000			—			—			—
Disposal of long-lived assets		3,237			497			—			—			—
Adjusted EBITDA		(4,257	)		(8,464	)		(18,704	)		(28,208	)		(8,481	)

From total net loss, standard EBITDA items such as interest, taxes, depreciation and amortization were added back. Additional investment gains and losses were adjusted as these items are considered non-operating and/or in the start-up phase of operations. Non-cash fair value adjustments to inventory and biological assets were adjusted as these were non-cash. Restructuring costs were adjusted as they are considered one-time non-recurring charges. Other non-cash items are removed to arrive at Adjusted EBITDA which is a measure used by industry to approximate operating earnings.

During the three months ended April 30, 2020, the Company’s Adjusted EBITDA decreased further from the previous quarter due increased gross margin before fair value adjustments of 40% and a 10% decrease to general and administrative, marketing and promotion and R&D expenses costs in Q3 2020. (See section Revenue, Cos of Sales and Operating Expenses for variance assessments).

Biological Assets – Fair Value Measurements

As at April 30, 2020, the changes in the carrying value of biological assets are as follows:

	April 30, 2020				July 31, 2019
Carrying amount, beginning of period		$	7,371			$	2,332
Acquired through acquisition(1)			—				3,291
Production costs capitalized			30,395				19,215
Net increase in fair value due to biological transformation less cost to sell			21,378				38,856
Transferred to inventory upon harvest			(52,563	)			(56,323	)
Write off of biological assets and destruction costs			(663	)			—
Carrying amount, end of period		$	5,918			$	7,371

¹Acquired through the acquisition of Newstrike Brands Ltd. completed on May 24, 2019

As at April 30, 2020, the fair value of biological assets included $6 in seeds and $5,912 in cannabis plants ($2 in seeds and $7,369 in cannabis plants as at July 31, 2019). During the three and nine months ended April 30, 2020, the Company recorded destruction costs and a write off on its biological assets of $nil and $663, respectively, due to the suspension of production at the Niagara facility.

30        MD&A

The valuation of biological assets is based on an income approach in which the fair value at the point of harvesting is estimated based on selling prices less the costs to sell. For in process biological assets, the fair value at point of harvest is adjusted based on the stage of growth at period-end.

Management’s identified significant unobservable inputs, their range of values and sensitivity analysis are presented in the tables below.

Unobservable inputs	Input values		An increase or decrease of 5% applied to the
			unobservable input would result in a change
			to the fair value of approximately
	April 30, 2020	July 31, 2019	April 30, 2020		July 31, 2019
Weighted average selling price Derived from actual retail prices on a per product basis using the expected Flower and Trim yields per plant.	$3.64 per dried gram	$4.23 per dried gram	$	416	$	601
Yield per plant Derived from historical harvest cycle results on a per strain basis.	65 – 157 grams per plant	15 – 123 grams per plant	$	290	$	295
Stage of growth Derived from the estimates of stage of completion within the harvest cycle.	Average of 40% completion	Average of 29% completion	$	290	$	295
Waste Derived from the estimates of planned removal and naturally occurring waste within the cultivation and production cycle.	0%–30% dependent upon the stage within the harvest cycle	0%–30% dependent upon the stage within the harvest cycle		No material variance		No material variance

Quarterly Results

The following table presents certain unaudited financial information for each of the eight fiscal quarters up to and including the quarter ended April 30, 2020. Past performance is not a guarantee of future performance, and this information is not necessarily indicative of results for any future period.

	Q3 ’20			Q2 ’20			Q1 ’20			Q4 ’19
	April 30, 2020			January 31, 2020			October 31, 2019			July 31, 2019
Net revenue	$	22,132		$	17,007		$	14,499		$	15,424
Total net loss		(19,519	)		(298,167	)		(60,016	)		(44,729	)
Loss per share – basic		(0.07	)		(1.13	)		(0.23	)		(0.21	)
Loss per share – fully diluted		(0.07	)		(1.13	)		(0.23	)		(0.21	)
	Q3 ’19			Q2 ’19			Q1 ’19			Q4 ’18
	April 30, 2019			January 31, 2019			October 31, 2018			July 31, 2018
Net revenue	$	13,017		$	13,438		$	5,663		$	1,410
Total net loss		(7,751	)		(4,325	)		(12,803	)		(10,509	)
Loss per share – basic		(0.04	)		(0.02	)		(0.07	)		(0.05	)
Loss per share – fully diluted		(0.04	)		(0.02	)		(0.07	)		(0.05	)

The Company’s net revenues have increased considerably during the previous quarters when compared to the first quarter of fiscal 2019 and beyond. This is due to the legalization of adult-use cannabis in Canada and the Company’s introduction into this market beginning on October 17, 2018.

The net loss in the period has decreased significantly from the previous quarter as a result of $250,850 in impairments to goodwill, property, plant and equipment, intangible assets associated with the Niagara, ON facility realized in that period, see ‘Operating Expenses’ section. The first quarter’s loss of fiscal 2020 was mostly impacted by $25,879 of inventory and biological asset impairment losses and write offs. The significant jump in the Company’s total loss realized in the fourth quarter of fiscal 2019 was primarily due to approximately $23,000 in additional operating expenses the $23,041 impairment loss on inventory. The third quarter of fiscal 2019 saw increased general, administrative and stock based compensation expenses due to the growth of scale in the Company’s operations. In the second quarter of fiscal 2019 a stabilization in marketing/branding expenses occurred from the previous quarter thus reducing the net loss, offset by increased gross margin due to the Company’s first full quarter of adult-use sales. The Company experienced a ramp up of expenses to prepare for the legalized adult-use market primarily in the first quarter of fiscal 2019 and quarter four of fiscal 2018 resulting in increased net losses. The fourth quarter of fiscal year 2018 ended July 31, 2018 pertains to the Company’s operations

31        MD&A

within the medical market only and included in the first quarter of fiscal 2018 were tremendous scaling efforts to meet the coming demand of the adult-use market legalized on October 17, 2018.

Financial Position

The following table provides a summary of our interim condensed financial position as at April 30, 2020 and July 31, 2019:

	April 30, 2020			July 31, 2019
Total assets	$	697,962		$	878,623
Total liabilities		146,066			89,911
Share capital		869,505			799,706
Share-based payment reserve		67,241			40,315
Warrants		73,474			60,433
Contributed Surplus		31,328			—
Non-controlling interest		1,000			1,000
Deficit	$	(490,652	)	$	(112,742	)

Total Assets

Total assets decreased to $697,962 as at April 30, 2020 from $878,623 as at July 31, 2019. Goodwill was impaired to $nil from $111,877. Cash and cash equivalents decreased cumulatively to $94,325 from $113,568 section – Liquidity and Capital Resources. Short term investments decreased by $25,003, due to the liquidation of the Company’s GICs. Property plant and equipment increased by $60,812 primarily due to continued leasehold improvements to the Belleville facility, capitalized right of use assets which contributed $21,109 (new in fiscal 2020 due to adoption of IFRS 16) and the associated required additional production equipment required within the facility. The additions to property, plant and equipment were offset by the impairment of the Niagara facility and certain of its equipment in the amount of $33,004, due to the Company’s revised production capacity needs. An impairment of Niagara facilities cultivation and production licenses resulted in a reduction to intangible assets in the amount of $106,189. In connection with the disposal of the Niagara facility and certain its assets, $11,506 of property, plant and equipment has been classified as available for sale. During the period the Company contributed $27,880 to its investment in associate – Truss Beverage Co., the increase in investment was offset by $4,468 in equity loss pickups from Truss and the Company’s joint ventures. Convertible debenture decreased to $399 from $13,354 from the comparative period as the Company has converted and disposed of the underlying securities during the period, the remaining balance pertains to accrued unpaid interest.

Total Liabilities

Total liabilities increased to $146,066 as at April 30, 2020 from $89,911 as at July 31, 2019. The increase was driven by the issuance of $70,000 of unsecured convertible debentures in December 2019, which continue to accrue interest, resulting in the long-term liability of $48,715 which was not present in the comparative period. The Company also closed two registered offerings for a combined USD$45,000 which resulted in an additional warrant liability which has been valued at $2,018. New the fiscal year is the adoption a new lease accounting standard (see section IFRS 16 – Leases) which resulted in the recognition of an assumed lease liability in the amount of $30,748. Accounts payable have decreased to $26,736 from $45,581 due to the Company’s rightsizing of operations and continued push towards a positive adjusted EBITDA.

Share Capital

Share capital increased to $869,505 as at April 30, 2020 from $799,706 at July 31, 2019. Financings in December 2019, January 2020 and April 2020 contributed share capital of $74,969, offset by applicable issuance costs of ($5,570). An increase of share capital of $223 and $177 due to the exercising of stock options and warrants, respectively, were realized during the nine months ended April 30, 2020.

Share-Based Payment Reserve

The share-based payment reserve increased to $67,241 as at April 30, 2020 from $40,315 as at July 31, 2019. The net increase of $26,926 mainly represents the total share-based compensation incurred in the period. During the nine months ended April 30, 2020, 116,532 stock options were exercised resulting in a moderate decrease to the reserve of $87.

Warrants Reserve

The warrant reserve increased to $73,474 as at April 30, 2020 as compared to July 31, 2019, due to the addition of a $20,183 warrant reserve for the 59,800,000 warrants issued on April 13, 2020 under the public offering. This increase was offset decrease of $5,650 was the result of the expiration of the 10,512,208 outstanding January 2018 financing’s common share purchase and further by $1,491 due to the expiration of 4,678,307 outstanding February 2018 common share purchase warrants.

32        MD&A

Contributed Surplus

The Company generated $31,328 of contributed surplus during the period. The expiration of certain of the Company’s warrants (as outlined above) contributed $7,142. The expiry of vested stock options contributed $312 and the net balance of $23,875 was the resulting fair valuation of the conversion feature attached to the $70,000 convertible debentures issued in December 2019.

Liquidity and Capital Resources

Liquidity

Our objectives when managing our liquidity and capital structure are to maintain sufficient cash to fund our working capital needs, capital asset development and contractual obligations.

For the nine months ended	April 30, 2020			April 30, 2019
	$			$
Operating activities		(93,631	)		(44,437	)
Financing activities		161,556			103,765
Investing activities		(87,168	)		(17,862	)

Operating Activities

Net cash used in operating activities for the nine months ended April 30, 2020 increased to ($93,631) from ($44,437) in the comparative period as a result of the total net loss of ($377,910) adjusted for the following:

• Changes to non-cash working capital of ($59,650) comprised primarily of; increased inventory of ($87,243) (nine months ended April 30, 2019 – ($35,433)) and decreased biological assets of $22,168 (nine months ended April 30, 2019 – $26,309)

• Goodwill impairment of $111,877 (nine months ended April 30, 2019 – Nil);

• Other asset impairments of $139,193 (nine months ended April 30, 2019 – Nil);

• Impairment of right of use assets of $1,178 (nine months ended April 30, 2019 – Nil);

• Unrealized revaluation gain on biological assets of ($21,378) (nine months ended April 30, 2019 – ($33,534));

• Impairment losses on inventory of $39,311 (nine months ended April 30, 2019 – Nil);

• Fair value of inventory sold of $21,360 (nine months ended April 30, 2019 – $9,072); and

• Share based compensation of $22,237 (nine months ended April 30, 2019 – $17,811).

Financing Activities

Net cash from financing activities for the nine months ended April 30, 2020 was $161,556, increased from net cash generated in the comparative period of $103,765 due to the following events.

• The Company generated $70,000 (nine months ended April 30, 2019 – Nil) through the issuance of unsecured convertible debentures;

• The Company generated $104,748 through the issuance of common shares under three separate offerings (nine months ended April 30, 2019 – $57,558); and

• Issuance costs of ($5,773) (nine months ended April 30, 2019 – ($3,767)) were incurred.

Investing Activities

During the nine months ended April 30, 2020, ($87,168) was used for investing activities compared to cash inflows of $17,862 in the comparative period. The cash outflows were comprised of the following;

• Net cash of $24,726 (nine months ended April 30, 2019 – $112,651) was acquired through the disposal of short-term investments;

• The Company incurred capital expenditures over property, plant and equipment of ($95,998) (nine months ended April 30, 2019 – ($103,073)); and

• Capital calls were made to the Company’s joint ventures and investments in associates of ($29,220) (cash contributed to Truss and joint ventures in the nine months ended April 30, 2019 – ($7,298)).

Going Concern

The interim financial statements have been prepared using International Financial Reporting Standards (IFRS) applicable to a going concern, which assumes that the Company will be able to continue its operations and will be able to realize its assets and settle its liabilities in the normal course of business as they come due in the foreseeable future.

For the three and nine months ended April 30, 2020, the Company reported a loss of $19,519 and $377,910, respectively, including impairment charges of $220 and $251,070, respectively, related to goodwill, intangible assets, and property plant and equipment;

33        MD&A

negative cash flows from operating activities of $12,685 and $98,197 respectively; and an accumulated deficit of $19,612 and $490,652, respectively.

In the previous quarter’s MD&A, Management had identified its circumstances that lend substantial doubt as to the ability of the Company to meet its obligations as they come due and accordingly, the appropriateness of the use of accounting principals applicable to a going concern. Management executed on its plan to secure the necessary financing to support ongoing operations, including maintaining compliance with existing debt covenants, existing commitments, and costs of acquiring new investments for additional product offerings.

On April 13, 2020 the Company received funding of $43,290 net of issuance costs (see ‘Capital Resources’), which complied with certain covenants of the Company’s term loan. As at April 30, 2020, the Company had net working capital of $215,661 and cash and cash equivalents of $94,325. On May 18, 2020 holders of $29,860 of convertible debenture principal agreed to accept early conversion of their debentures reducing the Company’s obligations and on May 21, 2020 the Company received additional funding of $52,524 net of issuance costs (see ‘Other Corporate Highlights and Events’).

Management has concluded that the Company’s existing cash and cash equivalents, short term investments and trade receivables are expected to provide sufficient liquidity to meet cash outflow requirements for at least the next twelve months.

Capital Resources

As at April 30, 2020, working capital totaled $215,661. The exercise of all the in-the-money as at April 30, 2020, issued and outstanding warrants, restricted share units and stock options would result to an increase of cash of approximately $nil, $nil and $216, respectively.

The following table represents the Company’s public and private financing’s during fiscal year 2019 and the nine months ended April 30, 2020 of the current fiscal year. The remaining cash related to finances raised for general corporate and working capital needs are prorated based timing of funds raised and the current periods cash flow.

Date	Type	Gross Proceeds	Initially Intended Use of Net Proceeds	Actual Usage of Proceeds
January 30, 2019	Public offering of common shares	$57,500	The Company’s stated use the net proceeds from the Offering was for general corporate purposes, including funding the Company’s global growth initiatives and research and development to further advance the Company’s innovation strategies.	As witnessed in the Company’s consolidated statement of cash flows for the year ended July 31, 2019 a total of $124,706 of cash was utilized for operating activities, inclusive of $2,822 of R&D expenses. This usage is consistent with the original intended use of the financing and it is reasonable to conclude the financings net proceeds were fully utilized in the fiscal year of 2019.
December 5, 2019	Issuance of 8.0% unsecured convertible debentures	$70,000	The Company’s stated intended use of the net proceeds were for working capital and general corporate purposes.	The Company has remained compliant with its general intended use as at April 30, 2020 and management has not undertaken new direction over the intended use of these funds as at the reporting date.
				The approximated financing net proceeds remaining at the end of Q3’20 is $14,735.
December 31, 2019	Registered direct offering	USD$25,000	The Company’s stated intended use of the net proceeds from the offering were for working capital needs and other general corporate purposes, including funding the Company’s R&D to further advance the Company’s innovation strategies. The Company expects to use the net proceeds from the Offering in pursuit of its ongoing general business objectives. To that end, a substantial portion of the net proceeds from the Offering are expected to be allocated to working capital requirements and to the continuing development and marketing of the Company’s core products.	The Company incurred operating losses in the three and nine months ended April 30, 2020. Management has not adjusted its originally intended use of the net proceeds of the financing. The Company incurred approximately $2,218 of R&D expenses during past two quarters. To the extent that the Company has negative operating cash flows in future periods, it may need to deploy a portion of the net proceeds from the Offering and/or its existing working capital to fund such negative cash flow. Management will have significant discretion and flexibility in applying the net proceeds from the offering. The financing net proceeds remaining at the end of Q3’20 is $18,522.

34        MD&A

January 21, 2020	Registered direct offering	USD$20,000	The Company intends to use approximately USD$5,000 of the net proceeds from the offering for capital expenditures relating to its 1 million sq. ft. B9 facility in Gatineau, Québec. It also intends to use at least USD$3,000 million of the net proceeds from the Offering to fund CBD derived from hemp initiatives aimed at potential business expansion into the United States. The balance of the net proceeds from the Offering will be used for working capital and other general corporate purposes, including the continuing development and marketing of the Company’s core products, operational excellence initiatives, and research and development to further advance the Company’s innovation strategies. The Company has not yet determined to pursue any particular stand-alone research and development initiative, and will evaluate such initiatives as they present themselves, including the terms, capital requirements or timing of any such initiatives.	Management has not adjusted its originally intended use of the net proceeds of the financing. The Company also capitalized $14,779 to its B9 facility in Q2’20 and $8,389 in Q3’20 thus utilizing the USD$5,000 financing proceeds. To the extent that the Company has negative operating cash flows in future periods, it may need to deploy a portion of the net proceeds from the Offering and/or its existing working capital to fund such negative cash flow. Management will have significant discretion and flexibility in applying the net proceeds from the offering. The financing net proceeds remaining at the end of Q3’20 are estimated at $6,027.
April 13, 2020	Underwritten public offering	$46,046	The net proceeds generated from the public offering amounted to $43,290. The Company’s stated intended use of the net proceeds were for working capital and general corporate purposes.	The Company incurred operating losses in the three and nine months ended April 30, 2020. Management has not adjusted its originally intended use of the net proceeds of the financing. To the extent that the Company has negative operating cash flows in future periods, it may need to deploy a portion of the net proceeds from the Offering and/or its existing working capital to fund such negative cash flow. Management will have significant discretion and flexibility in applying the net proceeds from the underwritten public offering. The financing net proceeds remaining at the end of Q3’20 are estimated at $41,923

$46,000 Underwritten Public Offering

On April 13, 2020, the Company closed an underwritten public offering for the purchase and sale of 59,800,000 units at a price of $0.77 per unit for gross proceeds of $46,046 before deducting fees and other estimated offering expenses, including 7,800,000 units sold pursuant to the exercise in full of an over-allotment option on closing. Each unit was comprised of one common share and one common share purchase warrant. The warrants have a five year-term and an exercise price of $0.96 per share.

USD$20,000 Registered Direct Offering

On January 21, 2020 the Company closed a registered direct offering with institutional investors for the purchase and sale of

11,976,048 common shares at an offering price of USD$1.67 per share for gross proceeds of USD$20,000 before deducting fees and other estimated offering expenses. The Company also issued to the investors common share purchase warrants to purchase 5,988,024 common shares of the Company. The warrants have a five year-term and an exercise price of USD$2.45 per share.

USD$25,000 Registered Direct Offering

On December 31, 2019 the Company closed a registered direct offering with institutional investors for the purchase and sale of 14,970,062 common shares at an offering price of USD$1.67 per share for gross proceeds of USD$25,000 before deducting fees and

35        MD&A

other estimated offering expenses. The Company also issued to the investors common share purchase warrants to purchase 7,485,032 common shares of the Company. The warrants have a five year-term and an exercise price of USD$2.45 per share.

Issuance of 8.0% unsecured convertible debentures

On December 5, 2019, the Company closed a private placement of 8.0% unsecured convertible debentures for gross aggregate proceeds of $70,000, maturing on December 5, 2022 (the “Debentures”). The Debentures are convertible at the option of the holder at any time after December 7, 2020 and prior to maturity at a conversion price of $3.16 per share (the “Conversion Price”), subject to adjustment in certain events. The Company may force the conversion of all of the then outstanding Debentures at the Conversion Price at any time after December 7, 2020 and prior to maturity on 30 days’ notice if the daily volume weighted average trading price of the common shares of the Company is greater than $7.50 for any 15 consecutive trading days.

At any time on or before December 4, 2020, the Company may repay all, but not less than all, of the principal amount of the Debentures, plus accrued and unpaid interest.

On maturity, the holders of the Debentures have the right to require the Company to repay any principal amount of their Debentures through the issuance of common shares of the Company in satisfaction of such amounts at a price equal to the volume weighted average trading price of the common shares on the TSX for the 5 trading days immediately preceding the payment date. In accordance with the rules of the TSX, shareholder approval will be required for the issuance of any common shares where: (i) the number of common shares issuable would exceed 25% of the number of common shares outstanding prior to the closing date; or (ii) the number of common shares issuable to insiders would exceed 10% of the number of common shares outstanding prior to the closing date.

All securities issued in connection with the offering were subject to a four month hold period that expired on April 6, 2020.

Under this offering, certain insiders of the Company purchased and were issued, directly or indirectly, $8,020 principal amount of Debentures, which constituted “related party transactions” within the meaning of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”). The issuance to the insiders is exempt from the formal valuation and minority shareholder approval requirements of MI 61-101, as the fair market value of the Debentures issued to, and the consideration paid by, such persons did not exceed 25% of the Company’s market capitalization.

During the period, the Company announced the early conversion option for the Debentures, see section – ‘Early Conversion Options for Debentures’.

CAPITALIZATION TABLE

Our authorized share capital is comprised of an unlimited number of common shares. The table below outlines the number of issued and outstanding common shares, warrants, options and restricted share units as at July 31, 2019, April 30, 2020 and June 10, 2020.

	June 10, 2020		April 30, 2020		July 31, 2019
Common shares		408,607,219		343,915,819		256,981,753
Warrants		118,779,413		87,560,813		29,585,408
Options		26,671,388		27,262,609		24,288,919
Restricted share units		1,338,335		1,338,335		—
Total		555,396,355		460,077,576		310,856,080

Off-Balance Sheet Arrangements and Contractual Obligations

The Company does not have any off-balance sheet arrangements.

On February 15, 2019, the Company entered into a syndicated credit facility with Canadian Imperial Bank of Commerce (“CIBC”) as Sole Bookrunner, Co-Lead Arranger and Administrative Agent and Bank of Montreal as Co-Lead Arranger and Syndication Agent (together “the Lenders”). The Lenders will provide the Company up to $65 million in secured debt financing at a rate of interest that is expected to average in the mid-to-high 5% per annum range. The credit facility consists of a $50 million term loan and a $15 million revolving loan. The facility matures in February 14, 2022. The Company may repay the loan without penalty, at any time and contains customary financial and restrictive covenants, including maintaining a minimum cash balance of $15,000 up to maturity. The Company shall repay at minimum 2.5% of the outstanding balance each quarter per the terms of the credit facility agreement. The Company amended the credit facility effective January 31, 2020, in which the original terms were retained, and modifications made to the pre-existing covenants. The Company was in compliance with debt covenants at January 31, 2020. The Company is in compliance with the revised debt covenants as at April 30, 2020. The credit facility has been further amended effective March 27, 2020 to include a covenant that, on or before April 10, 2020: (i) the Company shall have received such securities regulatory authority exemptive relief as is necessary to permit it to conduct an “at-the-market distribution” of common shares; or (ii) the Company shall have (a) entered into one or more definitive agreements with purchasers for the sale of common shares for aggregate net proceeds of at least $15,000, and (b) taken all other steps reasonably necessary, including filing any prospectus and obtaining any stock exchange or other regulatory or third party approval as may be required, to complete the issuance and sale of such common shares as soon as reasonably practicable

36        MD&A

after the entry into of such definitive agreements. In addition, a covenant was added that the Company shall have received net cash proceeds from the issuance of equity securities of not less than $40 million on or before April 30, 2020, which was met on April 13, 2020 through an underwritten public offering of approximately $46 million.

The Company has certain contractual financial obligations related to service agreements, purchase agreements, rental agreements and construction contracts. These contracts have optional renewal terms that we may exercise at our option. The annual minimum payments payable under these contracts over the next five years are as follows:

Fiscal year	2020		2021 – 2022		2023 – 2024		Thereafter		Total
	$		$		$		$		$
Accounts payable and accrued liabilities		26,736		—		—		—		26,736
Excise taxes payable		4,221		—		—		—		4,221
Onerous contract		3,000		—		—		—		3,000
Convertible debentures		—		48,715		—		—		48,715
Term loan		3,500		28,000		—		—		31,500
Lease obligations		1,107		9,865		8,919		36,802		56,693
Capital projects (1)		4,395		9,592		—		—		13,988
Investment in associate		1,275		—		—		—		1,275
Service contracts		1,072		1,992		223		37		3,324
Purchase contracts		—		1,500		—		—		1,500
Lease based operating expenses (2)		1,923		7,676		6,872		20,348		36,819
		47,230		107,340		16,014		57,187		227,771

(1) Note the company is contemplating additional amounts to be spent on these project that have not yet been committed. Please refer ‘HEXO GROUP OF FACILTIES” for this information, which also includes a general summary of the projects.

(2) Lease based operating expense represent the variable operating expenses associated with the lease obligation under IFRS 16, Under IFRS all amounts charged that have no minimum fixed charge are considered variable and not capitalized.

LITIGATION

Class Actions

As of April 30, 2020, the Company is named as a defendant in securities class actions that have been filed in superior courts of the provinces of Quebec and Ontario and in the Supreme Court of the State of New York and the U.S. District Court for the Southern District of New York. One or more of the Company’s current and/or former officers and directors, and/or certain underwriters of past public offerings by the Company are also named as defendants in certain of the actions. The lawsuits assert causes of action under Canadian and U.S. securities legislation and at common law, in connection with statements made by the defendants that are alleged to have been materially false and/or misleading statements and their alleged failure to disclose material adverse facts. The alleged misrepresentations relate to, among other things, the Company’s forward-looking information, including but not limited to the Company’s forecast revenues for Q4 2019 and fiscal 2020, its inventory, “channel stuffing” and the Company’s supply agreement with the Province of Quebec. As at the date hereof, the amounts claimed for damages in each of these actions have not been quantified. These actions are in a preliminary stage and have not yet been certified as class actions.

While the Company cannot predict the outcome of the actions discussed above, it intends to assert all available defences and vigorously defend these proceedings. Defending litigation, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. Further, the Company’s underwriting agreement with the underwriters contains contractual indemnification provisions that may require the Company to indemnify the underwriters with respect to the claims against them and their legal costs of defending the actions. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position, and the limits of available insurance may be insufficient to cover our eventual liability.

MediPharm

On January 24, 2020, the Company was served with a statement of claim for $9.8M commenced by a vendor in respect of a supply agreement that was purportedly entered into between UP Cannabis and the vendor prior to the Company’s acquisition of Newstrike Brands Ltd. on May 24, 2019. The statement of claim filed against the Company is seeking payment of invoices alleged to be owing. In response, the Company filed a statement of defence and counterclaim on February 26, 2020. The supply agreement purports to contemplate that the Company would purchase certain cannabis products until February 2020. The Company intends to vigorously defend itself against such claim and intends to actively advance its counterclaim which alleges, among other things, that the supply agreement is void as it was entered into in bad faith. The full amount of the supplier’s claim in the amount of $9.8M is contested by the

37        MD&A

Company, and the Company is seeking repayment of the full value of the supply agreement of $35M from the supplier in its counterclaim.

Financial Risk Management

We are exposed to risks of varying degrees of significance which could affect our ability to achieve our strategic objectives for growth. The main objectives of our risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks. The principal financial risks to which we are exposed are described below.

Market Risk

Interest Risk

The Company has exposure to interest rate risk related to any investments of cash and cash equivalents. The Company may invest cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. The fluctuation of the interest rate may result in a material increase to the associated interest. As at April 30, 2020, the Company had short-term investments of $934 (July 31, 2019 - $517) and a term loan with a carrying value of $30,748 (July 31, 2019 – 33,374) (Note 18). All interest rates are fixed. An increase or decrease of 1% to the applicable interest rates would not result in a material variance to net loss.

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company’s level 1 and 2 investments are susceptible to price risk arising from uncertainties about their future outlook, future values and the impact of market conditions. The fair value of marketable securities and derivatives held in publicly traded entities is based on quoted market prices, which the shares of the investments can be exchanged for.

There would be no material impact (July 31, 2019 - $340) if the fair value of these financial assets were to increase or decrease by 10% as of April 30, 2020. The price risk exposure as at April 30, 2020 is presented in the table below.

	April 30, 2020			July 31, 2019
	$			$
Financial assets		2,452			16,756
Financial liabilities		(2,018	)		(493	)
Total exposure		434			16,263

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s trade receivables and convertible debentures receivable. As at April 30, 2020, the Company was exposed to credit related losses in the event of non-performance by the counterparties.

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Since the majority of the medical sales are transacted with clients that are covered under various insurance programs, and adult use sales are transacted with crown corporations, the Company has limited credit risk.

Cash and cash equivalents and short-term investments are held four Canadian commercial banks with Dun and Bradstreet credit ratings of AA and $664 is held with a credit union that does not have a publicly available credit rating. The majority of the trade receivables balance is held with crown corporations of Quebec, Ontario, Alberta and British Columbia. Creditworthiness of a counterparty is evaluated prior to the granting of credit. The Company has estimated the expected credit loss using a lifetime credit loss approach. The current expected credit loss for the nine-month period ended April 30, 2020 is $131 (July 31, 2019 - $37).

In measuring the expected credit losses, the adult-use cannabis trade receivables have been assessed on a per customer basis as they consist of a low number of material contracts. Medical trade receivables have been assessed collectively as they have similar credit risk characteristics. They have been grouped based on the days past due.

Credit risk from the convertible debenture receivable arises from the possibility that principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.

The carrying amount of cash and cash equivalents, restricted cash, short-term investments, trade receivables and convertible debentures receivable represents the maximum exposure to credit risk and as at April 30, 2020; this amounted to $129,861.

The following table summarizes the Company’s aging of trade receivables as at April 30, 2020 and July 31, 2019:

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	April 30, 2020		July 31, 2019
	$		$
0–30 days		15,449		14,102
31–60 days		871		1,826
61–90 days		126		166
Over 90 days		374		3,599
Total		16,820		19,693

Economic Dependence Risk

Economic dependence risk is the risk of reliance upon a select number of customers, which significantly impacts the financial performance of the Company. For the three and nine months ended April 30, 2020, the Company’s recorded sales to the crown corporation; Société québécoise du cannabis represents 76% and 75%, respectively, of total applicable periods gross cannabis sales (April 30, 2019 – 83% and 79%).

The Company holds trade receivables from the crown corporations Société québécoise du cannabis and the Ontario Cannabis Store representing 54% and 14% of total trade receivables as of April 30, 2020 (July 31, 2019 – 56% and 23%, respectively).

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. As at April 30, 2020, the Company had $95,259 (July 31, 2019 – $139,505) of cash and cash equivalents and short-term investments, and $16,820 in trade receivables.

The Company has current liabilities of $43,816 and contractual commitments of $24,883 due before the end of fiscal 2021. The Company’s existing cash and cash equivalents, short term investments and trade receivables are expected to provide sufficient liquidity to meet cash outflow requirements over the next twelve months. If required, the Company also has access to an additional $15,000 capacity on the Term Loan (Note 15), which is available to be drawn upon until November 30, 2020.

The Company’s success in executing on its longer term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.

The carrying values of cash and cash equivalents, trade receivables and accounts payable and accrued liabilities approximate their fair values due to their short-term to maturity.

Critical Accounting Assumptions

Our financial statements are prepared in accordance with IFRS. Management makes estimates and assumptions and uses judgment in applying these accounting policies and reporting the amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Significant estimates in the accompanying financial statements relate to the valuation of biological assets and inventory, stock-based compensation, warrants, the estimated useful lives of property, plant and equipment, and intangible assets. Actual results could differ from these estimates. Our critical accounting assumptions are presented in Note 3 of the Company’s amended and restated annual audited consolidated financial statements for the fiscal year ended July 31, 2019, which is available under HEXO’s profile on SEDAR and EDGAR. Changes to the accounting assumptions and their underlying methodologies and inputs are presented in Note 3 of the unaudited condensed interim consolidated financial statements for the three and nine months ended April 30, 2020.

Adopted and Upcoming Changes in Accounting Standards

IFRS 16, Leases

As disclosed in note 4 of the interim financial statements, the Company has revised certain financial information related to the adoption of IFRS 16 Leases, that was previously included in the interim financial statements for the period ended October 31, 2019. At August 1, 2019, lease liabilities were understated by $3,562, and right of use assets were understated by the same amount due to an error in the estimate of the Company’s incremental borrowing rate. The IBRs utilized for administrative real estate and production real estate were 8% and 12%, respectively (previously disclosed as 15.95% and 18.95%).

The Company adopted IFRS 16 Leases on August 1, 2019, which introduces a new approach to lease accounting. The Company adopted the standard using the modified retrospective approach, which does not require restatement of prior period financial information, as it recognizes the cumulative impact on the opening balance sheet and applies the standard prospectively. Accordingly, the comparative information in these unaudited interim consolidated financial statements is not restated.

39        MD&A

At the inception of a contract, the Company assesses whether the contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This policy is applied to contracts entered into, or modified, on or after January 1, 2019.

Practical expedients

Effective August 1, 2019, the IFRS 16 transition date, the Company elected to use the following practical expedients under the modified retrospective transition approach:

• Leases with lease terms of less than twelve months (short-term leases) and leases of low-value assets (less than $5,000 U.S. dollars) (low-value leases) that have been identified at transition were not recognized in the interim consolidated statement of financial position;

• Right-of-use assets on transition were measured at the amount equal to the lease liabilities at transition, adjusted by the amount of any prepaid or accrued lease payments;

• For certain leases having associated initial direct costs, the Company, at initial measurement on transition, excluded these directs costs from the measurement of the right-of-use assets; and

• Any provision for onerous lease contracts previously recognized at the date of adoption of IFRS 16 has been applied to the associated right-of-use asset recognized upon transition.

The Company as a lessee

Where the Company is a lessee, a right-of-use asset representing the right to use the underlying asset with a corresponding lease liability is recognized when the leased asset becomes available for use by the Company.

The right-of-use asset is recognized at cost and is depreciated on a straight-line basis over the shorter of the estimated useful life of the asset and the lease term on a straight-line basis. The cost of the right-of-use asset is based on the following:

• the amount of initial recognition of related lease liability;

• adjusted by any lease payments made on or before inception of the lease;

• increased by any initial direct costs incurred; and

• decreased by lease incentives received and any costs to dismantle the leased asset.

The lease term includes consideration of an option to extend or to terminate if the Company is reasonably certain to exercise that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

Lease liabilities are initially recognized at the present value of the lease payments. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Subsequent to recognition, lease liabilities are measured at amortized cost using the effective interest rate method. Lease liabilities are remeasured when there is a change in future lease payments arising mainly from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, renewal or termination option.

The payments related to short-term leases and low-value leases are recognized as other expenses over the lease term in the interim consolidated statements of loss and comprehensive loss.

Significant accounting estimates and assumptions

In the situation where the implicit interest rate in the lease is not readily determined, the Company uses judgment to estimate the incremental borrowing rate for discounting the lease payments. The Company’s incremental borrowing rate generally reflects the interest rate that the Company would have to pay to borrow a similar amount at a similar term and with a similar security. On adoption of IFRS 16, the Company has determined a single IBR as the discount rate across all administrative real estate leases due to the leases containing similar characteristics. A separate IBR was used for the discounting of the Company’s production real estate property. The IBRs utilized for administrative real estate and production real estate were 8% and 12%, respectively.

The Company estimates the lease term by considering the facts and circumstances that create an economic incentive to exercise an extension or termination option. Certain qualitative and quantitative assumptions are used when evaluating these incentives.

The Company as a lessor

The Company’s unaudited interim consolidated financial statements were not impacted by the adoption of IFRS 16 Leases in relation to lessor accounting. Lessors will continue with the dual classification model for recognized leases with the resultant accounting remaining unchanged from IAS 17, Leases.

40        MD&A

Impact of Change in Accounting Policy

On August 1, 2019, the Company recognized $21,360 of right-of-use assets and $19,488 of lease liabilities. The Company applied its weighted average incremental borrowing rate as at August 1, 2019 to determine the amount of lease liabilities. The effect of the adjustment to the amounts recognized in the Company’s interim consolidated statement of financial position at August 1, 2019 is shown below:

	August 1, 2019, as previously reported		IFRS 16 remeasurement adjustments on August 1, 2019		As reported under IFRS 16 August 1, 2019
Assets
Non-current
Property, plant and equipment	$	258,793	$	21,360	$	280,153
Total Assets	$	258,793	$	21,360	$	280,153
Liabilities
Current liabilities
Lease liabilities		—		3,556		3,556
Non-current liabilities
Lease liabilities		—		17,804		17,804
Total Liabilities	$	—	$	21,360	$	21,360

Total commitments as at July 31, 2019 were $192,230, which included certain contractual financial obligations related to service agreements, purchase agreements, operating lease agreements, and construction contracts. Of this total, $101,741 is related to operating lease commitments. The following is a reconciliation of total operating lease commitments as at July 31, 2019 to the lease liabilities recognised as at August 1, 2019:

Total operating leases commitments as at July 31, 2019	$	101,741
Less: Variable components of operating leases		(49,330	)
Less: Low value and/or short-term lease		(88	)
Operating lease liability before discounting		52,323
Adjustment to reflect discounting of operating lease commitments at August 1, 2019, using the incremental borrowing rate		(30,963	)
Total lease liabilities recognized under IFRS 16 as at August 1, 2019 (Note 31)	$	21,360

Related Party Transactions

Key Management Personnel Compensation

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the Company’s operations, directly or indirectly. The key management personnel of the Company are the members of the executive management team and Board of Directors, and they control approximately 4.63% of the outstanding shares of the Company as at April 30, 2020 (July 31, 2019 – 6.15%).

Compensation provided to key management during the period was as follows:

	For the three months ended						For the nine months ended
	April 30, 2020			April 30, 2019			April 30, 2020			April 30, 2019
Salary and/or consulting fees		$	715		$	1,698		$	2,365		$	3,429
Termination benefits			427			—			427			—
Bonus compensation			—			113			42			328
Stock-based compensation			4,302			6,207			13,894			13,506
Total		$	5,444		$	8,018		$	16,728		$	17,263

These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed by the related parties.

The Company leases a space in Belleville from the related party BCI, that supports its manufacturing activities and is based in Belleville, Ontario. The Company paid $5,510 during the nine months ending April 30, 2020. This lease is recognized on the Company’s balance sheet under IFRS 16.

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The Company subleases portion of its Belleville lease to another related party Truss Beverage Co. The accrued charges on this lease amount to $380 during the nine months ended April 30, 2020. This sublease is recognized as a capital lease receivable on the Company’s balance sheet.

Unless otherwise stated, the below granted stock options will vest on the one-year anniversary of the date of grant and the balance will vest quarterly over two years thereafter.

On April 28, 2020, the Company granted certain of its executives a total 900,000 stock options with an exercise price of $0.69. One-third of the stock options will vest on each of the one-year anniversaries of the date of grant over a three-year period.

On October 29, 2019, the Company granted certain of its executives a total of 829,034 stock options and 1,428,449 RSU’s with an exercise price/unit value of $3.30. One-third of the stock options will vest on each of the one-year anniversaries of the date of grant over a three-year period. The RSU’s vest in full on the third-year anniversary after the grant date.

On July 26, 2019, the Company granted certain of its directors a total 250,000 stock options with an exercise price of $5.88.

On July 18, 2019, the Company granted certain of its executives a total 650,000 stock options with an exercise price of $6.54.

On March 20, 2019, the Company granted certain of its executives a total 325,000 stock options with an exercise price of $8.50.

On February 21, 2019, the Company granted the CEO 3,333,333 stock options with an exercise price of $7.46. Additional to the standard vesting terms as defined in Note 11, is an achievement condition in which vesting may only occur once a volume weighted average trading price of $10 or greater is achieved for a 20-day period prior to a vesting date. All unvested options will carry over and vest if the condition is met at a future vesting date.

On February 19, 2019, the Company granted certain of its executives a total 615,000 stock options with an exercise price of $7.13.

On December 17, 2018, the Company granted certain of its executives a total 74,000 stock options with an exercise price of $5.09. Of which, 54,000 stock options will fully vest at the 6-month anniversary of the grant date.    

On September 17, 2018, the Company granted certain executives of the Company a total of 650,000 stock options with an exercise price of $7.93.

Internal Controls over Financial Reporting

In accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), the establishment and maintenance of Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”) is the responsibility of management. The DCP and ICFR have been designed by management based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to provide reasonable assurance that the Company’s financial reporting is reliable and that its financial statements have been prepared in accordance with IFRS.

Regardless of how well the DCP and ICFR are designed, internal controls have inherent limitations and can only provide reasonable assurance that the controls are meeting the Company’s objectives in providing reliable financial reporting information in accordance with IFRS. These inherent limitations include, but are not limited to, human error and circumvention of controls and as such, there can be no assurance that the controls will prevent or detect all misstatements due to errors or fraud, if any.

The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. An evaluation of the design of Disclosure Controls was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, the material changes to the control environment and the material weakness in our internal control over financial reporting as at April 30, 2020, are set forth below.

Material Changes to the Control Environment

During the period the Company continued to embark on a transformation project, enabled by a new end to end Enterprise Resource Planning (“ERP”) system. When completed, the project will provide an integrated system for inventory tracking and valuation from seed to sale. The project was launched in November 2017 to standardize and automate business processes and controls across the organization. As at April 30, 2020, the system’s Finance, Sales and Procurement processes were functional. It will continue to be rolled out for inventory tracking and processing throughout the fiscal year. The project is a major initiative that is utilizing third party consultants, and a solution designed specifically for the cannabis industry. The new ERP is intended to facilitate improved reporting and oversight and enhance internal controls over financial reporting.

Identified Material Weaknesses and Remediation Plan

A material weakness in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

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Management has performed a detailed risk assessment to identify key account and business processes and related controls, which was informed by process flow mapping with key control owners.

As of the three and nine months ended April 30, 2020, management has identified the following material weaknesses in the Company’s internal control over financial reporting and implemented the associated remediation activity as outlined below.

COMPLEX SPREADSHEET CONTROLS

Management concluded that the Company did not implement and maintain effective controls surrounding complex spreadsheets. Spreadsheets are inherently prone to error due to the manual nature and increased risk of human error. The Company’s controls related to complex spreadsheets did not address all identified material risks associated with manual data entry, documentation and review of assumptions, processes and estimate methodology, completeness of data entry, and the accuracy of formulas.

The Company has engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of complex spreadsheet internal controls over financial reporting. The Company intends to move towards an ERP which possesses specific functionality to remove the manual nature and usage of complex spreadsheets in future periods.    

IMPLEMENTATION OF AN ERP

The Company did not have effective information technology (IT) general controls over all operating systems, databases, and IT applications supporting financial reports. Accordingly, process-level automated controls and manual controls that were dependent upon the information derived from IT systems were also determined to be ineffective.

The Company has engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of IT related internal controls over financial reporting. The Company intends to fully implement the ERP during fiscal 2020 and will only take reliance upon such controls once the appropriate level of testing is reached.

INVENTORY COUNT

The Company did not have effective controls around its inventory count procedures, specifically with respect to its reconciliation of the ERP system, due to the details outlined in the previous change to control environment section.

To further strengthen controls surrounding inventory, management has initiated or enhanced the following procedures;

• Segregation of duties to initiate work, production orders and inventory adjustments will be strengthened;

• Work, production orders and inventory adjustments will be reviewed and approved by the relevant supervisor;

• Further enhancements to the ERP inventory processing, tracking and reporting functionality and supporting work procedures in order to ensure their sustainability;

• Additional training, guidance and communications to internal teams and third-party inventory count providers regarding inventory management, count and reconciliation procedures.

PROCUREMENT

The Company did not maintain effective controls over the purchasing of capital goods and services, including the authorization of purchases, processing and payment of vendor invoices, the classification of various expenses and capitalization of assets.

To strengthen the controls surrounding the procurement process, management has initiated or enhanced the following procedures;

• Enhancements to the ERP’s purchasing functionality; including segregation of duties to initiate and release purchase orders;

• Additional training, guidance and communications to internal teams regarding the Company’s procurement policies and required adherence to the Governance Authority Matrix.

FINANCIAL REPORTING

The Company did not maintain effective process level and management review controls over manual financial reporting processes and the application of IFRS and accounting measurements related to certain significant accounts and non-routine transactions.

To strengthen the controls surrounding the financial reporting process, management has initiated the following;

• Assessing the financial and accounting resources in order to identify the areas and functions that lack sufficient personnel and other resources.

• Hiring additional personnel, to be dedicated to the implementation, maintenance and monitoring of disclosure and financial controls; and,

• Engaging third-party advisors with appropriate expertise to assist in the application of complex accounting measurements and non-routine transactions.

43        MD&A

Risk Factors

Our overall performance and results of operations are subject to various risks and uncertainties that may materially and adversely affect our business, products, financial condition and operations and may cause actual performance, results and achievements to differ materially from those expressed or implied by forward-looking statements and forward-looking information, including, without limitation, the following factors, some of which, as well as other factors, are discussed in our Annual Information Form dated October 28, 2019 available under our profile on www.sedar.com, which risk factors should be reviewed in detail by all readers:

• Management has applied significant judgment in the assessment of the Company’s ability to continue as a going concern when preparing its interim consolidated financial statements for the periods ended April 30, 2020 and 2019. Management prepares the interim consolidated financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. The Company has considered the private placement subsequent to April 30, 2020 as disclosed in Note 32 in making this assessment. The Company’s existing cash and cash equivalents, short term investments and trade receivables are expected to provide sufficient liquidity to meet cash outflow requirements over the next twelve months. If required, the Company also has access to an additional $15,000 capacity on the Term Loan, which is available to be drawn upon until November 30, 2020. The Company’s success in executing on its longer term strategy is dependent upon its ability to fund the repayment of existing borrowings and to generate positive cash flows from operations. If additional liquidity is required, management plans to secure the necessary financing through the issuance of new public or private equity or debt instruments. There is no assurance that additional future funding will be available to the Company, or that it will be available on terms which are acceptable to management.

• Our business operations are dependent on our licence under the Cannabis Regulations. These licenses expire on various dates and must be renewed by Health Canada. Failure to comply with the requirements of our licenses or any failure to renew the license would have a material adverse impact on our business, financial condition and operating results.

• Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all regulatory approvals, where necessary, for the production and sale of our products. We cannot predict the time required to secure all appropriate regulatory approvals for our products, or the extent of testing and documentation that may be required by governmental authorities.

• While to the knowledge of our management, the Company is currently in compliance with all laws, regulations and guidelines relating to the marketing, acquisition, manufacture, management, transportation, storage, sale and disposal of cannabis as well as including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment, changes to such laws, regulations and guidelines due to matters beyond our control may cause adverse effects to our operations.

• We operate in a dynamic, rapidly changing environment that involves risks and uncertainties, and as a result, management expectations may not be realized for a number of reasons.

• The volatile Canadian cannabis industry has resulted in several of the Company’s peers to undergo similar rightsizing efforts which could saturate the market with similar assets the Company intends to sell. This could result in further future losses and/or the inability for the Company to liquidate certain of its unneeded assets.

• Since the latter part of February 2020, financial markets have experienced significant volatility in response to the developing COVID-19 pandemic and equity markets in particular have experienced significant declines. The continued spread of COVID-19 nationally and globally may impact the Company’s ability raise sufficient capital.

• The continued spread of COVID-19 nationally and globally could also disrupt our cultivation and processing activities, supply chains and sales channels, and result in a reduction in supply of, or demand for, the company’s products as a result of travel restrictions, work refusals by and mandatory accommodations for employees, changing demand by consumers, mass quarantines, confinements, lock-downs or government-imposed closures in Canada or abroad, which could adversely impact materially the company’s business, operations or financial results.

• We operate within a still young and evolving industry and are exposed to certain risks surrounding the fair value inputs related to the valuation of our biological assets and inventories, which may lead to certain impairments and write-offs. These inputs include but are not limited too market pricings, external and internal demand for cannabis and cannabis products and by-products.

• Reliance on management’s and key persons’ ability to execute on strategy. This exposes us to management’s ability to perform, as well as the risk of management leaving the Company.

• We face intense competition from licensed producers and other companies, some of which may have greater financial resources and more industry, manufacturing and marketing experience than we do.

• The number of licenses granted, and the number of licensed producers ultimately authorized by Health Canada could have an impact on our operations. We expect to face additional competition from new market entrants that are granted licences under the Cannabis Regulations or existing license holders which are not yet active in the industry.

• We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to manage growth effectively will require it to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base.

44        MD&A

• Conversely, we may be subject to growth decline related risks including reduced capacity needs and inactivity of our internal systems and related assets. Our ability to manage growth volatility effectively will require us to continue to monitor our external industry environment and modify our internal operations accordingly.

• The Company’s credit facility, could expose the Company to risks that its cash flows may become insufficient to satisfy required payments of principal and interest, the risk of increased interest rates as certain of the Company’s borrowings would likely be at variable rates of interest, and enforcement risk in the event of default.

• The credit facility contains covenants that require the Company to maintain certain financial ratios. If the Company does not maintain such ratios, it could have consequences for the availability of credit under the credit facility or result in repayment requirements that the Company may not be able to satisfy. Restrictions and covenants from those facilities may limit the Company’s ability to execute its plans.

• Given the nature of our business, we may from time to time be subject to claims or complaints from investors or others in the normal course of business which could adversely affect the public’s perception of the Company.

• We are currently a party to certain class action and other lawsuits as discussed elsewhere in this MD&A and we may become party to additional litigation from time to time in the ordinary course of business which could adversely affect our business.

• Failure to adhere to laws and regulations may result in possible sanctions including the revocation or imposition of conditions on licenses to operate our business; the suspension or expulsion from a particular market or jurisdiction or of our key personnel; and the imposition of fines and censures.

• The potential expansion into international operations will result in increased operational, regulatory and other risks.

• There may be a risk of corruption and fraud in any emerging markets in which the Company expands too.

• The Company’s operations in emerging markets to which it expands could pose an increased inflation risk on the business.

• The Company ability to successfully identify and make attractive acquisitions, joint ventures or investments, or successfully integrate future acquisitions

• The development of our business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by Health Canada.

• Our activities and resources are currently primarily focused on our facilities on the Gatineau and Belleville campuses, and we will continue to be focused on these campuses for the foreseeable future. Adverse changes or developments affecting these campuses would have a material and adverse effect on our business, financial condition and prospects.

• We expect to derive a significant portion of our future revenues from the legalized adult-use cannabis industry and recently legalized edible cannabis 2.0 market in Canada, including through our agreements various provincial governing bodies which do not contain purchase commitments or otherwise obligate the purchaser to buy a minimum or fixed volume of products from HEXO.

• We expect to derive a significant portion of our future revenues from the sale of future products of which are still being actively developed and put into production. Failure to adequately meet market demand for edible product in a timely fashion may adversely impact the Company’s profitability.

• The adult-use cannabis industry is encountering price compression, which may adversely impact the Company’s profitability. In addition, such price compression, as well as, or together with, oversupply of certain types of inventory in the industry, may result in the Company incurring additional impairment losses on inventory in the event the cost of our inventory exceeds its net realizable value. The continuing evolution of these market conditions represent ongoing uncertainties that may affect the Company’s future financial results.

• We have incurred operating losses since commencing operations and may incur losses in the future and may not achieve profitability.

• Our growth strategy contemplates outfitting the Company’s multiple facilities with additional production resources. There is a risk that these additional resources will not be completed on time, on budget, or at all.

• A key aspect of our business is growing cannabis, and as such we are exposed to the risks inherent in any agriculture business, such as disease spread, hazards, pests and similar agricultural risks that may create crop failures and supply interruptions for our customers.

• Our cannabis growing operations consume considerable energy, making us vulnerable to rising energy costs. Volatility of energy costs and the loss of preferred rate status may adversely impact our business and our ability to operate profitably.

• We believe the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity.

45        MD&A

• As a manufacturer and distributor of products designed to be ingested or inhaled by humans, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our products involve the risk of injury or loss to consumers due to tampering by unauthorized third parties, product contamination, unauthorized use by consumers or other third parties.

• Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure.

• Our business is dependent on a number of key inputs and their related costs including raw materials and supplies related to our growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact our business, financial condition and operating results.

• Conflicts of interest may arise between the Company and its directors.

• We may not pay any dividends on our common shares in the foreseeable future.

• The Company may be at risk as a result of breaches of security at its facilities or in respect of electronic documents, data storage and risks related to breaches of applicable privacy laws, cyber security risks, loss of information and computer systems.

• Our common shares are listed on the TSX and NYSE; however, there can be no assurance that an active and liquid market for the common shares will be maintained, and an investor may find it difficult to resell such shares.

• There is no assurance the Company will continue to meet the listing requirements of the NYSE (see “Other Corporate Highlights and Events – Non-Compliance with NYSE Listing Notification”).

• The Company is subject to restrictions from the TSX and NYSE which may constrain the Company’s ability to expand its business internationally.

• The market price for our common shares may be volatile and subject to wide fluctuations in response to numerous factors, including governmental and regulatory regimes, community support for the cannabis industry, variations in our operating results, changes in our business prospects, as well as many other factors that are beyond our control. The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the recreational marijuana industry in Canada.

• An investment in our securities is speculative and involves a high degree of risk and uncertainty.

• We may issue additional common shares in the future, which may dilute a shareholder’s holdings in the Company.

• The Company may not be successful in the integration of acquisitions into our business.

• The Company may be unable to successfully achieve the objectives of our strategic alliances.

• The Company’s operations are subject to increased risk as a result of international expansion.

• The Company operates in a highly regulated industry which could discourage any takeover offers.

• We maintain or self-insure various types of insurance such as, but not limited to, errors and omissions insurance; directors’ and officers’ insurance; property coverage; and general commercial insurance, recall insurance, cyber security insurance, warehouseman insurance and cargo insurance. A judgment against any member of the Company in excess of available coverage could have a material adverse effect on us in terms of damages awarded and the impact on our reputation.

• Based upon the nature of the Company’s current business activities, the Company does not believe it is currently an “investment company” (“IC”) under the U.S. Investment Company Act of 1940. However, the tests for determining IC status are based upon the composition of the assets of the Company and its subsidiaries and affiliates from time to time, and it is difficult to make accurate predictions of future assets. Accordingly, there can be no assurance that the Company will not become an IC in the future. A corporation generally will be considered an IC if; more than 40% of the value of its total assets excluding cash and U.S. government securities are comprised of investment securities, which generally include any securities of an entity the corporation does not control. If the Company were to become an IC, it would not be able to conduct public offerings of securities in the U.S.

• Our operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. We will incur ongoing costs and obligations related to compliance with environmental and employee health and safety matters. Failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, in penalties or in restrictions on our manufacturing operations.

• The Company’s ERP may impact the scoping, requirements definition, business process definition, design and testing of the integrated ERP system could result in problems which could, in turn, result in disruption, delays and errors to the operations and processes within the business and/or inaccurate information for management and financial reporting.

• The Company may not be able to develop and maintain strong internal controls and be SOX compliant by the mandated deadline.

46        MD&A

• We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data.

• The Company is subject to continuous evolving corporate governance, internal controls and disclosure regulations that may increase the risk of non-compliance, which could adversely impact the Company, its market perception and valuation.

47        MD&A

EX-99.3

Exhibit 99.3

Form 52-109F2

Certification of Interim Filings

Full Certificate

I, Sébastien St. Louis, Chief Executive Officer of HEXO Corp., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of HEXO Corp. (the “issuer”) for the interim period ended April 30, 2020.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period

(a) a description of the material weakness;

1

(b) the impact of the material weakness on the issuer’s financial reporting and its ICFR; and

(c) the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.

5.3 Limitation on scope of design: N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on February 1, 2020 and ended on April 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: June 10, 2020

/s/ Sébastien St. Louis

Sébastien St. Louis

Chief Executive Officer

2

EX-99.4

Exhibit 99.4

Form 52-109F2

Certification of Interim Filings

Full Certificate

I, Stephen Burwash, Chief Financial Officer of HEXO Corp., certify the following:

1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of HEXO Corp. (the “issuer”) for the interim period ended April 30, 2020.

2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a) designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i) material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii) information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b) designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2 ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period

1

(a) a description of the material weakness;

(b) the impact of the material weakness on the issuer’s financial reporting and its ICFR; and

(c) the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.

5.3 Limitation on scope of design: N/A

6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on February 1, 2020 and ended on April 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: June 10, 2020

/s/ Stephen Burwash

Stephen Burwash

Chief Financial Officer

2